In our latest video, David Tobin, Senior Managing Director, discusses expectations and trends he’s spotted in Gateway City loans (that’s New York, Los Angeles and San Francisco, in particular), and what this means for Loan Sales in 2022.
Gateway city loans will continue to struggle in 2022 with low rates, extensions and restructures necessary to support portfolio performance. We see ongoing structural issues in the office, retail and hospitality sectors in New York, San Francisco and Los Angeles.
“According to Green Street, 70% of office workers will work remotely at least part-time within the next five to ten years…reducing demand for office space by about 15% and accelerating an ongoing deurbanization trend.”
Kastle Systems’ back-to-work barometer measures key card and fob system activity and shows a 40.6% physical occupancy of office across 10 top US cities with NYC and LA the bottom dwellers at between 36% and 37%.
Negative pre-COVID retail and banking trends were accelerated by the pandemic, particularly in urban locales.
CVS recently announced a 10% reduction in its 9900 store chain as grocery offerings and prescription sales continue to migrate on-line and over saturated infill locations right size.
Of 85,000 total bank branches today, nearly 3,400 closed in 2020. Urban located bank branch closures far outpace all other areas across all demographics because of competitive over-expansion pre-pandemic and continued digital disruption.
Manhattan sublease office space exploded during the pandemic peaking at 21.3mm sf in June 2021 compared to 8.2mm sf in 2016 and 11.6mm sf on the eve of the pandemic.
Finally, business travel continues to struggle with the biggest group oriented large format full service hotels, particularly in urban locations and less competitive select service hotels everywhere with PIP and cap ex issues.
What does this mean for loan portfolios? Persistently low interest rates have subsidized asset prices and gateway city loan portfolio collateral value for years. The specter of real inflation for the first time in a generation combined with real regulatory enforcement of asset quality and a real need for actual debt service payments will drive de-risking of bank balance sheets in 2022. We expect loan sale activity to continue to be muted but priced aggressively as liquidity rules. Hospitality loan sale offerings have been and will continue to be a robust bright spot in an otherwise anemic trading market. The wildcard? Inflated equity markets rapidly deflating and liquidity disappearing.