By Graham Summers, MBA
Is this the next black swan?
The commercial real estate market in the U.S. is about $20 trillion in size. This is not a small asset class. And thanks to the pandemic changing work habits, the Fed creating a massive credit bubble, and many cities going soft on crime, the collapse of commercial real estate may very well be the next black swan event.
In its simplest rendering, the problems facing commercial real estate are as follows:
1) People do NOT want to return to the office, even if the pandemic is over.
2) Valuations/ prices in the market have been badly distorted by the Fed, both indirectly via the massive credit bubble the Fed created in 2020-2022, and directly by the Fed offering to buy commercial mortgage backed securities (the last point put a floor beneath this market).
3) Many large cities have decided to go soft on crime, resulting in criminal activity skyrocketing. As a result of this and heavy tax burdens, large businesses are moving out of places like Chicago, New York and the like.
It’s literally a perfect storm for the commercial real estate sector.
Oh… and lest we forget, much of this asset class is financed by trillions of dollars worth of debt. And that debt is now coming due.
The New York Post notes that $1.5 trillion worth of commercial real estate debt comes due by the end of 2025. Bear in mind, rates have done this since much of this debt was issued:
So commercial real estate firms will either need to pay this back (hard to imagine given office vacancies) or roll the debt over at much higher interest rates.
And last but not least… guess who loaned out all this debt to commercial real estate developers and landlords?
Perhaps this is why the regional banking sector can’t rally despite the Fed gifting them hundreds of billions of dollars worth of cheap credit over the last month.
What does this mean?
A $20 trillion asset class is fast approaching its “2008” moment.
Indeed, our proprietary Crash signal has just triggered its 3rd confirmed signal in the last 25 years. The last two times it signalled?
2000 and 2008.
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