S&P Global — 16, July 2024
Daily Update: July 16, 2024
Falling Commercial Real Estate Prices Remain a Challenge in Pockets
By Nathan Hunt
Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy
The woes of commercial real estate are well documented. The shift in working styles and the rise of online shopping have dealt a double blow to an asset class that was once considered a reliable source of regular income. At this point, fears of marketwide contagion effects from a large-scale commercial real estate (CRE) collapse appear to be overblown. But, in pockets, falling CRE prices are hitting some banks, real estate investment trusts and commercial mortgage-backed securities.
The US Securities and Exchange Commission has been probing certain US banks with high exposure to CRE. Independent Bank Group, New York Community Bancorp, Western Alliance Bancorp and at least four other community banks have received requests from the SEC to provide additional details on their CRE loan portfolios. While the SEC has not disclosed the reasons for the additional scrutiny, the reasons for concern may be inferred from the information the agency is requesting. The requests ask for additional information on industry and geographic breakdowns, average loan-to-value ratios, ranges of loan-to-value ratios, occupancy percentages, loan modifications, frequency and sources of appraisals, and risk management. The SEC appears to be concerned that some banks may be obscuring CRE-related losses on their balance sheets.
S&P Global Ratings recently published credit loss forecasts for global banks. On the topic of losses related to CRE, the authors saw exposure for some banks directly through exposure and indirectly through declining consumer and business confidence. Overall, though, the banking sector appears well placed to weather any losses from CRE through a selective lending approach and good credit protection.
While some REITs have substantial exposure to CRE, much of the sector's losses appear to be priced in. A recent S&P Global Ratings report on European REITs projects an additional 4% decline this year, but 2024 appears to be the bottom of the market for these investment vehicles. This means that European REITs will have experienced an average decline of 13% since June 30, 2022, ranging from 3% to 30% in individual cases, with nonprime office spaces representing the largest fall in valuations.
Commercial mortgage-backed securities (CMBS) have been hit harder than other asset classes by the decline in CRE prices. For some US and European CMBS, the market declines exceed those experienced during the global financial crisis. S&P Global Ratings has downgraded 732 of the 2,799 CMBS ratings based upon deterioration in underlying CRE markets. Of those, 134 CMBS tranches have defaulted, including six tranches that were originally rated AAA. Continued high interest rates remain a challenge for CMBS because they limit the ability to refinance loans secured on lower-quality office properties in secondary locations.
Today is Tuesday, July 16, 2024, and here is today’s essential intelligence.
Australia ISP 2024: Blueprint to decarbonize the National Electricity Market
On June 26, the Australian Energy Market Operator (AEMO) released the Integrated System Plan (ISP) 2024 — a development path to transition the National Electricity Market (NEM) to net-zero by 2050. The ISP suggests that renewable energy connected with new transmission and upgraded distribution, firmed with storage and backed by gas-fired generation, is the lowest-cost, most resilient, pragmatic path to achieving the government's targets. S&P Global Commodity Insights' latest long-term outlook for the NEM is in general agreement with the primary findings of the ISP, but differences emerge within the timeline and the development pathway.
—Read the article from S&P Global Commodity Insights
Slowing US Inflation Boosts Chances Of 3 Fed Rate Cuts In 2024
The most reassuring inflation data since the US Federal Reserve began its battle against inflation through higher interest rates in March 2022 has lifted the odds of the central bank cutting rates as many as three times before the end of 2024. The consumer price index increased just 3% from June 2023 to June 2024, the US Bureau of Labor Statistics reported July 11. That is the lowest annual increase in the market's preferred inflation measure since March 2021 and a significant drop from June 2022, when annual growth peaked at about 9%. On a monthly basis, prices fell 0.1% from May.
—Read the article from S&P Global Market Intelligence
CreditWeek: How Are Risks To Credit Conditions Evolving At Midyear?
Most economies have seen solid growth so far this year — and ratings upgrades have outnumbered downgrades among corporates, financial institutions and sovereigns. US speculative-grade corporate bond spreads reached a new low of 230 basis points (bps) in early May and remain around 250 bps — indicating investors' high demand for debt. And while other regions haven't seen all-time lows in spreads, the trend is similar. Even European speculative-grade spreads remain roughly 40 bps narrower than they were at the start of the year, despite widening since the announcement of snap elections in France.
—Read the article from S&P Global Ratings
First Senegalese Crude Cargoes Bound For Dutch, German Refineries: Sources
Senegal's first ever crude cargoes will supply refineries in the Netherlands and Germany, according to trading sources and ship-tracking data, as the West African country celebrates its newfound status as an oil exporter. The Greek-flagged Maran Poseidon crude tanker arrived July 1 at the 100,000 b/d Sangomar oil project — operated by Australia's Woodside Energy — to lift Senegal's maiden cargo of medium-sour crude, according to S&P Global Commodities at Sea. The vessel is expected to finish loading and depart before July 20.
—Read the article from S&P Global Commodity Insights
Listen: A Jet-Setting Summer Crowns A New King Of The Barrel
Summer flying season has taken over for summer driving season. Jet fuel prices and demand have surged to record levels in June and July, and US officials report record-high numbers of airline passengers. Gasoline and diesel demand have largely been in line with seasonal norms, but US West Coast prices and demand have been dinged by increased adoption of biofuels and electric cars. Richard Swann, global director for clean refined products, discusses summer demand and more with clean products associate editorial director Matthew Kohlman and Americas middle distillates manager Jordan Daniel.
—Listen and subscribe to the podcast from S&P Global Commodity Insights
UK Election: How Do Politicians Solve Growing Datacenter Demand Problem?
A key component of the UK Labour Party's tech agenda involves making it easier to build datacenters, but analysts and experts say the problem goes far beyond building permits. The Labour Party has outlined an industrial strategy that both "supports the development of the artificial intelligence sector" and "removes planning barriers" for new datacenters. The Conservative Party, meanwhile, has doubled down on its support for UK equities by unlocking capital for high-growth companies and investing in computing and advanced manufacturing.
—Read the article from S&P Global Market Intelligence
There May Be Trouble Ahead: Q3 2024 Trade And Supply Chain Outlook (July 17, 2024)
Supply chain decision-makers have had a particularly thorny 2024 to navigate so far because of network disruptions and regulatory uncertainties. The second half of the year and early 2025 offer no respite, with the peak shipping season set to be particularly challenging.
—Register for the webinar from S&P Global Market Intelligence