"Nowhere To Hide In CMBS": CRE Nuke Goes Off With Small Banks Accounting For 70% Of Commercial Real Estate Loans
Recently we warned that the office commercial real estate implosion is rapidly transforming into the Big Short 3.0 (see "Why Small Banks Are In Big Trouble: As Hedge Funds Pile Into The New "Big Short", The Next 'Credit Event' Emerges") one which would also have a devastating impact on small banks due to their outsized exposure to the sector (Goldman recently calculated that up to 80% of all CRE lending goes through small and medium (<$250BN) banks, more on this below).
Now, it is JPMorgan's turn to freak out and as the bank writes in its weekly CMBS weekly note (available to pro subs), "what started as a spread widening episode in IG mezz in the week leading up to SVB’s collapse has infected AAA CMBS this past week regardless of format." Translation: what was a lingering and contained CRE issue until the recent small bank crisis, has spread across the entire CRE risk stack, and is now a ticking time bomb that threatens the solvency of the entire small bank sector, whose troubles so far have been limited to liquidity (i.e. deposit flight).