Corporate Real Estate Debt Defaults Likely To Hit America, Stress The System: Investing Legend Howard Marks

Corporate Real Estate Debt Defaults Likely To Hit America, Stress The System: Investing Legend Howard Marks


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To say Howard Marks knows a thing or two about the commercial real estate market would be an understatement. Marks is considered an investing legend. The billionaire businessman is the co-founder and co-chairman of Oaktree Capital Management, the largest investor in distressed securities worldwide. And now he’s warning that due to the remote working trend a major corporate real estate debt is on its way.

Marks is renown in the investment community for his “memos,” which detail his investment strategies and insight into the economy. “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book,” famed investor Warren Buffett reportedly once said.

According to Marks, massive mortgage defaults in the commercial real-estate sector are on the way.

“We’re very likely to see mortgage defaults in the headlines, and at a minimum, this may spook lenders, throw sand into the gears of the financing and refinancing processes, and further contribute to a sense of heightened risk,” Marks said. 

He added, “Developments along these lines certainly have the potential to add to whatever additional distress materializes in the months ahead.

In 2023, a whopping $450 billion in commercial real-estate debt is due to mature, meaning a final payment on those loans are due, Business Insider reported.

This could spell disaster for banks.

“Higher interest rates call for higher demanded capitalization rates (the ratio of a property’s net operating income to its price), which will cause most real estate prices to fall,” Marks said. “The possibility of a recession bodes ill for rental rates and occupancy, and thus for landlords’ income,” he added.

But it doesn’t represent total doom.

Marks however stressed that he’s not sure if banks will suffer losses on their commercial property loans, or what the magnitude will be.
“Mortgage defaults generally don’t signal the end of the story, but rather the beginning of negotiations between lenders and landlords. In many cases, the result is likely to be extension of the loan on restructured terms,” he said.

Photo by Pixabay: https://www.pexels.com/photo/architectural-design-architecture-bangkok-blue-534219/