Are half-empty offices a threat to banks?

Stocks oozed lower in yesterday's session as investors watched, and waited, and watched, and waited for this morning’s CPI numbers. The debt ceiling debate took center stage yesterday leaving everyone wondering whether or not it is a cause for concern, and if so, what might a default do to the markets.

Open door policy. In this very Fed-focused world that we are in today, many of us are grasping for any information that can help us better understand not only what is going on in the shadows of the economy, but also what those hammer-wielding central bankers are planning to do to strengthen their resumes. Sure, there is the policy itself which we learn about immediately after it is voted on. A few weeks after that we can read the minutes from the Fed’s policy meeting… the very watered-down, carefully crafted notes about what the policymakers discussed behind closed doors. But these days, more than ever before, Fed members are quite vocal and very much willing to share their thoughts on all matters policy and the economy. I post Fed members’ speaking schedules, though I understand that listening to a Fed economist speak is probably low priority if you are sitting patiently… nervously in your Dentist’s waiting room. I understand if you would rather read that 2-year-old people magazine with torn out pages. Don’t worry, I got you covered.

Let’s just start with today’s Consumer Price Index / CPI release which is a key piece of data in the Fed’s equation. Is inflation increasing, decreasing, or staying the same? That is a question that we all want answered, especially given that the Fed has said, so very often, that it is data dependent. The Fed Chair has said that he thinks rate hikes may be over for now… but he is leaving the door open to changes in policy, based on data. Very non-definitive, but it is the responsible thing to do, just in case. John Williams, who is the New York Fed President, said just yesterday that he is leaving the door open to a pause in rate hikes at the next meeting… based on the torrent of data that is expected between now and the Fed’s June 14^th meeting. More data dependence and another open door. The Fed Head has left the door open to more hikes while the second most powerful FOMC member (don’t be offended non-New Yorkers, we didn’t make the rules) has left the door open to no hikes. When you add that up, it comes to… well, zero, meaning, anything can happen. The smartest thing to do is to watch that data to which the Fed’s policy is so dependent on. Start this morning.

The very same NY Fed Chief, John Williams offered us up some non-policy information worth noting. In referring to Monday’s release of the financial stability report, he focused on real estate valuations. Wait, why real estate, isn’t Williams a banker? As you might guess, given the recent banking mess, many investors are concerned about the health of the banking sector. So, when the Fed asks senior loan officers of all the US banks “what’s up,” we all want to know… well, what’s up… or down. Based on that, Williams has intimated that the health of commercial real estate, particularly offices, is a “real issue” for banks, though he made sure to say that it is not an immediate threat to stability (you can hear his compliance handler breathing a sigh of relief). According to the report, more than half of the participants said that CRE loans is their top concern for financial stability. To put things in perspective, it is estimated that community and regional banks hold over $2 trillion in commercial real estate debt. The report relayed that despite rising vacancy rates and sinking incomes, valuations remain strong. Williams said that the strong valuations understated the problems in the sector. There is a clear trend away from full-time office work to WFH and hybrid, but it is not clear just how that will play out. What does that mean? Well, as in all things financial, the best way to find a value on something is to witness a transaction. I can tell how much I think my car is worth, but until I go to sell it, it is just conjecture, and hopefully based on comprehensive financial analysis. Many industry watchers, Williams included, know that we will only truly know the health of those assets when they turn over. In the CRE world, cycles are typically 5 years, based on the most common loan maturities. It is usually at those intervals that transactions occur. Whether that transaction is a sale or simply a refinance, it is a telling moment when it comes to the value of a property. Back to those banks who have books full of those loans which could be overvalued. A further stress is how realistic bad loan provisions are for bank’s CRE loans. If you have been paying close attention, and I know that there is at least one contingent of my regular readers that are, you would have noticed some very, very big real estate investment companies simply turning in the keys of some of their failed investments. “Turning in the keys,” is a polite way of saying that they are defaulting. AND, those properties, as you might guess, are typically large, class A-type properties. So, should we be worried about another proverbial shoe dropping. I am sorry to say, that it is hard to tell. Not all of those loans will mature at the same time and not all properties and geographic regions are the same. Regarding on the holders of those loans, some banks are more exposed to them than others. That means that if some of those loans end up in default, it is not likely to be widespread, and the impact of the defaults will vary depending on the strength of the lenders. Folks, this is likely to remain an issue going forward. Should rates come down in the future, the systemic problems of higher vacancy will not be solved, however cheaper financing will empower buyers and refinancings. Unfortunately, valuations on those properties may have to be revised.

WHAT’S SHAKIN’ THIS MORNIN’ ☀

Akamai Technologies Inc (AKAM) shares are higher by +4.97% in the premarket after the company announced that it beat EPS and Revenue estimates by +6.02% and +0.51% respectively. The company’s guidance on the current quarter was in line with analysts’ estimates while its full year guidance was above. Potential average analyst target upside: +16.5%.

Wynn Resorts Ltd (WYNN) shares are up by +0.72% in the premarket after the company announced that it beat EPS targets in Q1. The company announced that it would resume its quarterly cash dividend which will be paid on June 6^th to shareholders on record as of May 23^rd. Dividend yield: 0.89%. Potential average analyst target upside: +9.9%.

YESTERDAY’S MARKETS

Stocks ended the session slightly lower yesterday as investors awaited today’s CPI numbers. The S&P500 fell by -0.46%, the Dow Jones Industrial Average drifted lower by -0.17%, the Nasdaq Composite Index traded off by -0.63%, and the Russell 2000 Index declined by -0.27%. Bonds declined and 10-year Treasury Note yields gained +1 basis point to 3.51%. Cryptos advanced by +0.82% and Bitcoin added +0.35%.

NEXT UP

• Consumer Price Index / CPI (April) may have remained constant at +5%, while the core figure may have slipped to +5.5% from +5.6%. PAY ATTENTION
• The Treasury will auction $35 billion 10-year notes today.
• After the closing bell earnings: Flex Ltd, Robinhood, Walt Disney Co, AppLovin, Beyond Meat, and Ginko Bioworks.