Bond giant PIMCO sees another wave of bank failures coming as commercial mortgage trouble mounts

Defaults have risen across the sector amid higher borrowing costs and slumping demand, with the latter especially true for office buildings, which have struggled against remote work trends.

This week, Fitch Ratings revised its office delinquency forecasts up to 8.4% and 11% for 2024 and 2025, respectively.

The main lenders to the sector have been mid-sized regional banks, and worries of fallout have intensified on Wall Street. According to Bloomberg, regional lenders who jumped into real estate have watched assets fall to a fraction of their peak value.

“As stressed loans grow due to maturities, however, we expect that banks will start selling these more challenged loans to reduce their troubled loan exposures,” Murray said, adding that Pimco has loaded up on the loans being sold off by other institutions.

The distress is already apparent in markets. Early this month, shares of Axos Financial fell 15% after a short seller targeted the bank’s commercial real estate loan exposure. New York Community Bancorp plummeted in February after its unexpected quarterly loss was partially tied to exposure to the property market.

Meanwhile, major dealers benefit from some protection, given post-2008 regulation that limits their CRE lending capacity, Murray told Bloomberg. But even with guardrails in place, bigger lenders are pulling away from the industry, amid the rise in defaults, he noted.

At the same time, a study recently outlined that big banks may be more exposed to a potential meltdown than typically understood, given indirect lending via credit lines to real estate investment trusts. These funds are also shaking under the weight of the property sector, as REIT investors are quickly pulling out.

Murray added that non-bank US debt funds are also an issue, given that they’re responsible for over $200 billion in loans that are set to mature next year.