Bank Tightening, Commercial Real Estate And Natural Gas Demand

Listen on the go! Subscribe to Wall Street Breakfast on Apple Podcasts and Spotify

This is an abridged conversation from Seeking Alpha’s Investing Experts podcast. Recorded on May 20, 2023

• 0:10 – Bank tightening; harbinger of recession?
• 4:00 – Commercial real estate, lot of problematic loans coming due
• 6:30 – Big themes for energy sector over next few years

Subscribe to Kirk Spano’s Margin of Safety Investing

Subscribe to CashFlow Hunter’s Catalyst Hedge Investing

Transcript

Kirk Spano: The banking sector in general, it’s going to tighten up. We don’t know exactly how much.

CashFlow Hunter: It has tightened up quite a bit. Yeah. I wrote an article about that, there is a survey put out that I never really paid that much attention to before, but economists have pointed it out to me, was the Senior Loan Officer Survey. And it’s starting to — Senior Loan Officers, particularly at regional banks, are responsible for an awful lot of liquidity and credit availability in this country, particularly for small and medium-sized businesses. And to the extent that they start saying, hey, we’re lending less, I think it has been predictive of the last six recessions going back to the 60s.

KS: Well, yeah, that’s something that I’ve been following as well. As I told you off-air, I consulted some private equity firms. And we’ve been looking at notes and properties and well, I was just in San Francisco. And it seems that the banks are going to get really tight here, because the regional banks actually provided a lot of the funding for a lot of the construction in the last 5, 6, 7, 8, 9, 10 years. And a big batch of those loans are due this year, next year, and the value of the properties is way below what’s owed on the properties.

So you’re seeing properties in big cities, Chicago, San Francisco, all over the place, because the vacancy rates are so high, I believe record highs. They can’t get the rents, which means that the value of the property is lower. And how are they going to refinance those notes without actually having to actually do a lot of work on the property to convert it somehow. So we’re looking at that right now.

Do you think that the impact is going to be that it pushes us into recession and affects a lot of other things? Or do you think that the banks muddle through with assistance from the Fed and we try to stay close to even on lending? Or do you really see lending tailing off quite a bit for a little while?

CH: I think lending will – it has tapered off. I think it will not rebound so fast. A lot of banks are going to be reluctant to lend until they really feel stability within their deposit base, which could happen sooner rather than later. But even if it does happen sooner, I don’t think banks are going to be so fast to lend, because the cost of deposits is still very high with an inverted yield curve relative to what they can lend to. So their net interest margins are getting squeezed pretty hard, yeah.

KS: And that is coming right into this debt ceiling, which I think that people misunderstand. We’re not going to default on the U.S. debt. However, once the debt ceiling gets raised, that’s a lot of liquidity that the Fed has to raise, because that’s where the government checkbook is. And that means that a lot of money is going to flow out of other places.

So we’re going to see tight liquidity from replenishing the government’s checkbook this summer and into the end of the year, something to the tune of $500 billion, $600 billion, $700 billion. And the banks, they’ve got a $1 trillion headache from the commercial loans. So we could potentially see way over a $1 trillion of tightening in the economy. Well, a trillion here, trillion there is a big deal.

CH: Yeah, I agree. And it’s — you touched on commercial real estate market. There’s an awful lot of loans that are coming due, that haven’t come due yet. And they’re going to be problematic. And it’s not just office buildings, although a lot of the real pain is going to be — the major, major write-offs are going to be in office buildings on a percentage basis.

But I think, look, there’s an awful lot of fairly crappy “Class A” that depends on your definition of Class A, garden apartment communities that were built an hour outside of Atlanta, or other Sunbelt states, or other Sunbelt cities that were financed at 70% to 80% loan to value. And those trades can be underwater fairly quickly. And a lot of people are not talking about potential losses that much in multifamily.

Look, there’s also an awful lot of warehouses and distribution centers that were bought or constructed during the COVID, post-COVID surge. And if the economy slows down, those things will not be able to realize rents that will support their debt,…