Billionaire investor Howard Marks sounds the alarm on commercial real estate – warning of a wave of mortgage defaults

• Billionaire investor Howard Marks sounded the alarm on the commercial real-estate sector.
• The Oaktree Capital co-founder warned of mortgage defaults that could add stress to the US financial system.

Billionaire investor Howard Marks rang the alarm on commercial real estate in what he labels as "one of the biggest worries" US banks face today.

In a Monday memo, the Oaktree Capital Management co-founder warned of a wave of mortgage defaults that could add stress to the US banking sector.

"We're very likely to see mortgage defaults in the headlines, and at a minimum, this may spook lenders, throw sand into the gears of the financing and refinancing processes, and further contribute to a sense of heightened risk," Marks said.

"Developments along these lines certainly have the potential to add to whatever additional distress materializes in the months ahead," he added.

The commercial real-estate market has become investors' newest concern thanks to higher interest rates, tighter lending standards – part of the fallout from the turmoil that hit banks in March – and work-from-home trends. That's a problem for smaller and mid-sized US banks which have high commercial property exposure.

High borrowing costs and tighter credit conditions caused by the banking jitters could raise hurdles for big property owners as they seek to refinance a pile of loans. Nearly $450 billion in commercial real-estate debt is due to mature in 2023 - meaning a final payment on those loans are due, per data cited from Trepp by JPMorgan.

"Higher interest rates call for higher demanded capitalization rates (the ratio of a property's net operating income to its price), which will cause most real estate prices to fall," Marks said. "The possibility of a recession bodes ill for rental rates and occupancy, and thus for landlords' income," he added.

Marks however stressed that he's not sure if banks will suffer losses on their commercial property loans, or what the magnitude will be.

"Mortgage defaults generally don't signal the end of the story, but rather the beginning of negotiations between lenders and landlords. In many cases, the result is likely to be extension of the loan on restructured terms," he said.