There’s a debt bomb ticking unyieldingly in the commercial real estate sector.
All the economists and analysts know it, investors know it, the banks know it and the mainstream financial press knows it.
But I’m not even going to attempt to predict how - or when - this whole scenario ends. Warning cries have been echoing since at least 2020 and the condition of the commercial real estate sector has only deteriorated further since then. There’s more debt, higher interest rates, higher payments, more delinquencies, less tenancy, less demand for office space, declining property values…and more risk to the banks and lenders, more risk to whoever is holding derivatives like Commerical Mortgage-Backed Securities (CMBS), and more risk to whoever posted these various assets as collateral to borrow money from somebody else. And now THOSE lenders ALSO have added risk since they likely borrowed against THOSE loans. And so the intertwined plot thickens.
Looking at a few numbers and some anecdotal evidence, we can see how banks are maneuvering to brace themselves, which gives us some indication of how things are trending.
The numbers are the numbers and show what they show; people aren’t paying their bills. But the craziest part is that we’re only in the early innings right now and 2024 is when the real pressure starts to ramp up.
“More than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points.” - Lisa Shallet, Morgan Stanley Wealth Management
With well over a TRILLION dollars worth of commercial real estate loans maturing or coming up for renewal in 2024, and no sign of rate cuts in the immediate future, it’s nearly impossible to imagine a scenario where everybody gets out unscathed. At the very least, there will be some regional banks that bear the brunt of the degenerating CRE market and will likely go under, with many losses being shared across the board.
However, the economy as a whole has remained incredibly resilient in the face of higher inflation and higher interest-rates, so I’m not going to take anything off the table in terms of possibilities. There are many ways to restructure debt as well as other safety measures that institutions like The Fed may deploy in the event of a major crisis. Furthermore, the banks that sit at the big boy table like the JPMorgan’s and Bank of America’s of the world are going to be fine and have undoubtedly been positioning themselves to sustain through the tumultuous headwinds that are facing the global financial system.
And as always, when everything starts crumbling, the “Too Big To Fail” banks will get bigger as they swallow up the floundering smaller fish for pennies on the dollar. Such is the way of life in this exploitative financial ecosystem where assets, money and resources ALWAYS flow upwards.
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