Real estate investment trusts are a less visible but growing threat to the health of balance sheets at large U.S. banks, new data has revealed.
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Credit and term loans provided to REITs increase lender exposure to commercial real estate by 40%, according to a new report from researchers at several universities.
Those risks have been largely understated amid a heightened focus on the impact of on-balance sheet CRE loans, particularly on the health of regional banks, New York University researcher and report co-author Viral Acharya told Bloomberg.
“We should not get caught in a blind spot that large banks have relatively less exposure than smaller banks,” Acharya, a former deputy governor at the Reserve Bank of India, said.
REITs often draw credit from banks when higher-than-average redemption requests threaten a liquidity crunch. This exact scenario played out last year, with a large number of shareholders pulling investments from REITs as higher interest rates jeopardized returns.
Many of the nation’s largest REITs, including Blackstone Inc. and Starwood Capital Group, responded by limiting the money investors could pull out.
But by the end of 2023, nontraded REITs fulfilled $20B in redemption requests, the largest annual total completed by the groups in their short history, Kevin Gannon, chairman and CEO of investment firm Robert A. Stanger & Co., told Bisnow in a previous interview.
The rebound in redemptions has put additional stress on big banks, the study revealed, with off-balance sheet exposure more than tripling to $345B between 2013 and 2022. In some cases, the money borrowed through lines of credit or term loans is used to buy additional properties, the report found.
Despite economic headwinds, REITs performed better than anticipated in 2023, with the FTSE Nareit All Equity REIT Index up 7.2% at the end of last year.
Even so, banks should be charging higher fees to mitigate draw-down risks, researchers said. Despite credit lines to REITs outpacing those of other borrowers, many are still increasing credit lines at unchanged rates. This could spell disaster, the report found, especially if the Federal Reserve fails to prevent a liquidity crisis through backstop protections.
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