May 1, 2023 - Economy & Business

Milken kicks off spotlighting banking system, commercial real estate

The State of the Global Financial System panel at the Milken Institute event in Los Angeles on Monday. Photo: Michael Flaherty/Aida Amer

Top executives at U.S. financial institutions flagged a broader concern around the nation's commercial real estate market, amid tumult in the banking sector.

Why it matters: The insights Monday morning come at a delicate time for the U.S. economy, which is digesting the government takeover of First Republic Bank, the FDIC's third bank intervention since March.

What they're saying: "There's already a lot of pressure in that area," said PGIM CEO David Hunt, referring to the commercial real estate market.

  • Hunt was speaking at an opening panel during the Milken Institute's Global Conference, an annual gathering of business and global leaders held in Los Angeles.
  • The panel pointed specifically to the strain on commercial real estate backed securities (CMBS) and the turmoil that the Fed's rapid rate hikes have caused across that segment.
  • "We're seeing CMBS as much as an opportunity as it is a challenge," added fellow panelist Rishi Kapoor, co-CEO of Investcorp.

Catch up quick: Remote work that took hold during the pandemic hollowed out cities, and sank office occupancy rates.

  • Rising interest rates added an additional layer of stress on commercial real estate market, as major loans come due for developers.

Yes, but: Certain parts of commercial real estate are under pressure, but not all of it, said Citigroup CEO Jane Fraser.

  • The bottom end of the CMBS stack will be under stress, she notes.
  • "But let's not make the sweeping statements and let's not tarnish all the regional and small banks" that provided loans to the sector, Fraser added.

Fraser's bottom line: The First Republic takeover addressed a critical uncertainty looming over the market, and the Citi leader's confidence in the U.S. financial system is unwavering.

  • "It's not perfect, but it's the envy of the world," Fraser says, adding that a "small handful" of banks were poorly managed and seizing headlines.
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