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How Would You Fix This Colossal Multi-Trillion Dollar Mess?

Everyone can see the slow-motion train wreck that is unfolding right in front of our eyes, but nobody has a plan to stop it.

Unfortunately, from a short-term perspective I don’t know if there is anything that can be done to prevent the commercial real estate bubble from imploding. Vacancy rates are surging to historic highs all over the nation, and without sufficient rental income many property owners will be forced to default. In addition, a giant mountain of commercial real estate mortgages will be up for refinancing over the next few years, and substantially higher interest rates will make refinancing those mortgages exceedingly difficult. We really are facing a “perfect storm” for the commercial real estate industry, and the fallout is going to be absolutely devastating for U.S. banks.

This is not a small problem. Offices are sitting empty from coast to coast, and the total commercial real estate market in this country is currently valued at somewhere around 20 trillion dollars

From Dallas and Minneapolis to New York and Los Angeles, offices sit vacant or underused, showing the staying power of the work-from-home era. But clear desks and quiet break rooms aren’t just a headache for bosses eager to gather teams in person. Investors and regulators, on high alert for signs of trouble in the financial system following recent bank failures, are now homing in on the downturn in the $20 trillion US commercial real estate market.

The pandemic sparked a “remote work” revolution, and now we have a lot of office space that is simply not needed any longer.

In fact, office vacancies in Manhattan are now at the highest level ever recorded

In New York’s Manhattan, office vacancies are at a record high, Bloomberg reported last week, even as new properties come online, adding even more space to the struggling market. And in Los Angeles and Chicago, office vacancies sat at 22.5% as of the fourth quarter of 2022.

This is a huge problem for property owners, because many of them don’t have enough tenants paying rent.

And as I mentioned earlier, an enormous pile of commercial mortgages “will be up for refinancing in the next couple of years”

They are a bellwether for what is likely to come, as more than half of the $2.9 trillion in commercial mortgages will be up for refinancing in the next couple of years, according to Morgan Stanley. “Even if current rates stay where they are, new lending rates are likely to be 3.5 to 4.5 percentage points higher than they are for many of CRE’s existing mortgages,” wrote Morgan Stanley Chief Investment Officer Lisa Shalett, in a recent report.

In the end, we are going to see an unprecedented wave of defaults and commercial property prices are going to crash really hard.

As I noted yesterday, Morgan Stanley is actually warning that commercial property prices “could fall as much as 40%”

With small- and medium-size banks accounting for 80% of commercial real estate lending, the situation might soon get worse, says experts. Commercial property prices could fall as much as 40% “rivaling the decline during the 2008 financial crisis,” forecast Morgan Stanley analysts.

Actually, I believe that projection is probably too optimistic.

At this point, commercial property prices are already down 15 percent from the peak of the market…

Prices in the United States were down 15% in March from their recent peak, according to data provider Green Street. The rapid increase in interest rates over the past year has been painful, since purchases of commercial buildings are typically financed with large loans.

In some markets, the carnage that we have already seen is quite breathtaking.

For example, Blackstone recently sold two office towers in southern California at a 36 percent loss

Private equity firm Blackstone sold two 13-story Class A office towers, the Griffin Towers, in Santa Ana, Orange County, California, for $82 million to a joint venture between Barker Pacific Group and Kingsbarn Realty Capital. The towers, built in 1987, have a vacancy rate of 24%. Blackstone had bought the towers in 2014 for $129 million, according to the Commercial Observer yesterday. The selling price makes for a loss of 36%. And Blackstone was lucky on this deal.

And an office tower in Houston just sold at a loss of 47 percent

In Houston, Parkway Property sold the 960,000-sf San Felipe Plaza in Uptown, to Sovereign Partners for $82.8 million in late March. The tower was built in 1984. Parkway Property ended up with the tower when it acquired Thomas Properties, which had bought the property in 2005 for $156.5 million. So this was a loss of 47%.

I don’t know why anyone would be willing to purchase commercial real estate at this stage.

Trying to catch a falling knife is a very dangerous thing.

Of course commercial real estate is not the only bubble that is bursting.

We have already seen the crypto bubble burst, we have seen the bond bubble burst, and residential real estate prices are starting to fall all over the nation.

So far, stock prices are hanging in there, but a number of experts are warning that a big crash is just around the corner

Legendary investor Jeremy Grantham has topped the board for an extreme prediction about US stocks. The market historian has forecasted the S&P 500 could tank as much as 50% this year to about 2,000, as an “everything bubble” bursts. Grantham said the prices of stocks, bonds, real estate, fine art, and other investments surged to unsustainable highs during the COVID-19 pandemic. Market experts Stephanie Pomboy and Larry McDonald echoed Grantham’s view – but with a less bearish prediction. While the pair expect stocks to crash as much as 30%, McDonald said the plunge could happen over the next two months as higher interest rates choke demand.

Our leaders were able to artificially prop up the system for a number of years, but now they have lost control.

A great financial earthquake has begun, and things are going to get really bad during the years that are in front of us.

But many people out there truly believed that the party would last forever, and so now they are in a position to get very badly burned as the system melts down all around them.


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