Over 27 million.
That’s how many square feet of empty office space San Francisco has.
If that number sounds too big to wrap your head around, I don’t blame you.
To put things in perspective, picture this…
San Francisco’s biggest tower has 1.4 million square feet of space. So there’s about 20 of those towers’ worth of empty space in San Francisco alone.
But this issue isn’t limited to America’s tech capital. It’s widespread across the country…
Right now, nearly 20% of office spaces are empty throughout the U.S. That’s even higher than the vacancy rate during the 2008 global financial crisis.
But this situation isn’t just a “landlord problem.” It has serious implications for regional banks and the wider economy.
So, today, I’ll talk about why the commercial real estate industry is in big trouble, and why there’s potentially more issues brewing on the horizon. I’ll also discuss what this whole situation means for the financial system, and what you can do to protect your wealth…
Commercial Real Estate Is Melting Down Fast
Commercial real estate is in trouble. And many influential people agree.
Billionaire tycoon Elon Musk recently said that commercial real estate is “melting down fast.”
Jamie Dimon, CEO of JPMorgan Chase, issued a warning that commercial real estate loans could cause major problems for U.S. banks.
Charlie Munger – Warren Buffet’s right-hand man – warned last month of a brewing storm in the U.S. commercial property market. According to him, American banks are full of “bad loans” as property prices fall.
Investment banking giant Morgan Stanley is predicting that commercial real estate prices will decline by as much as 40% in 2023. That’s greater than the 2008 financial crisis.
Despite these predictions, the worst is still yet to come. Here’s why…
There’s $1.5 trillion of debt maturing on commercial real estate by 2025. That’s roughly $500 billion a year that commercial real estate investors are on the hook for over the next three years.
That means owners will have to pay off or refinance their debts (more on that below) at a time when low occupancy has eroded building values, interest rates have gone up, and banks are tightening lending activity.
And many of them do not realize how much value their properties have lost.
According to Moody’s, U.S. commercial real estate prices fell in Q1 of 2023 for the first time since 2011… and its chief economist says that “more price declines are coming.”
The rating agency has also recently found that nearly a third of office buildings in its top 80 metros could be “obsolete.”
That’s a tough spot to be in as a landlord.
Having an office building is not good enough. You also need tenants to pay rent. Without rental income, it’s almost impossible to pay back the mortgage on your building.
This is a huge looming problem for commercial real estate investors. They may not feel it just yet, but that pain is coming soon enough…
Not Just a Landlord Problem
Landlords and commercial real estate investors won’t be the only ones feeling the squeeze.
Most of the $1.5 trillion in U.S. office space debt I mentioned above is owed to regional banks.
That’s because regional banks are heavily involved with commercial real estate. Across the whole country, regional banks are responsible for 70% of loans tied to the commercial real estate sector.
So when it comes to financing the fancy, yet empty office buildings, these regional banks are shouldering the load.
Keep in mind that the debt on those office buildings will come due, regardless of whether the spaces are occupied or not.
By the end of 2025, over half of the $2.9 trillion in commercial mortgages will require refinancing.
Refinancing is a bit like hitting the reset button on your loan. It’s a financial move where you swap out your old loan for a shiny new one that comes with its own set of rules.
But if your property’s value has dropped significantly, it can make refinancing a challenge.
Banks will hesitate to offer you a loan with favorable terms because they see your property as a riskier investment. They could tighten their requirements, demand a higher down payment, or offer less favorable interest rates. It’s like a game of give and take, where you might end up giving more than you’d like.
Now, I’ve been telling you about the issues plaguing regional banks in these pages. I’ve also said that the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank could repeat if depositors get really worried about their money or the stability of the institutions that hold it.
And the whole commercial real estate situation is clearly a threat.
Consider this…
Imagine you’re a bank and you lend me $150 million to buy a nice office space worth $170 million. Sounds like a solid investment, right?
But what if I hit rock bottom and can’t keep up with my monthly payments?
You, as the bank, have the right to seize the property as collateral. But that collateral is now worth a “measly” $130 million. So you’re looking at a $20 million loss.
Now, it’s not the end of the world if only one loan goes sour. But if bad loans start piling on your books, that spells even more trouble for the banks.
Here’s the bottom line.
Regional banks regularly dish out loans to investors, property owners, and developers in the commercial real estate business. If more people default on their loans and property values keep sliding, it’s not just the investors or developers that suffer.
It’s also the banks. And that puts the stability of our financial system at risk…
A Vicious Cycle
If commercial real estate values take a nosedive, banks will become more hesitant to hand out loans for commercial real estate projects.
That tightening of credit standards will only push commercial real estate values down even further.
This creates a vicious cycle. The more prices drop, the tighter the banks squeeze, and the deeper the prices plummet.
And it seems like this “vicious cycle” may have already kicked into gear. In the first quarter of 2023, commercial real estate loans plunged by a staggering 56% compared to the same time last year.
Plus, the latest survey by the Fed confirmed that most banks have tightened credit standards for loans secured by non-residential properties. None of them said they were easing those standards.
According to the Mortgage Bankers Association, commercial real estate lending is now crawling along at its slowest pace since 2014.
It’s clear that economic concerns and the regional banking crisis are making banks think twice about lending.
That doesn’t spell good news for the commercial real estate sector. And it doesn’t spell great news for your money, either…
What This Means for the Economy
All in all, I don’t see the commercial real estate market returning to normal anytime soon.
And that means increased instability for regional banks and our financial ecosystem.
In fact, because of increased uncertainty across the banking sector, I’m hosting an emergency briefing called Countdown to Chaos tomorrow at 8 p.m. ET.
During the event, I’ll explain the changes happening to our financial system… and how you can preserve your wealth if you position yourself ahead.
I’ve even discovered one little-known asset with the potential to 50x your money. To find out more about it, reserve your spot with one click here.
I look forward to seeing you there.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
P.S. The banking sector is not out of the woods yet. In fact, I’ve identified seven banks that are on the brink of failure. And I detailed them in a special report called The 722 Bank Bombshell: Is YOUR Bank Next to Fail?
To gain access to the report, simply upgrade to VIP when you sign up for my event instantly here.
Don’t sit on the sidelines while your bank could be the next one to go belly up. Join me in my emergency briefing tomorrow at 8 p.m. ET, and learn about how you can protect – and even grow – your wealth.
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