Commercial Real Estate Crisis
The $20 trillion commercial real estate industry is facing a crisis. It thrived for decades on low interest rates and easy credit. But that has come to an end. Rising interest rates have wreaked havoc on tech, fixed income, and the banking sector. You can now add commercial real estate to that list. After the most recent rate hike, JP Morgan said, “When the Federal Reserve hits the brakes, something goes through the windshield.”1
Commercial real estate used to be a pillar of investing. Then the pandemic lowered occupancy rates. People changed how they work and shop. Blackstone reduced its ownership of US office buildings from 50% of its portfolio to just 2%. “The companies that own traditional office, companies that own malls, this will be a very painful environment for them.” Blackstone had to put a limit on REIT investor redemptions to keep it solvent.2
Failing Real Estate, Failing Banks
Commercial real estate and regional banks are negatively reinforcing their own destruction. About 80% of all bank loans for commercial properties come from regional banks. The very same banks undergoing a liquidity crisis right now. “The recent stress in the banking sector has fueled growing concern about spillover effect on the commercial real estate industry,” wrote Goldman Sachs.
Concerns are swelling because banks are facing $270 billion in commercial mortgages set to mature this year. That is the highest amount on record. The bulk of that debt was financed when base interest rates were near zero. Meanwhile, asset values have been plummeting. Office prices have fallen roughly 17% in the past year.
Scott Rechler is a real estate CEO who serves on the board overseeing the New York Federal Reserve. He wrote, “This debt needs to be refinanced in an environment where rates are higher, values are lower, and in a market with less liquidity. If we fail to act, we risk a systemic crisis with our banking system.”3
The bank’s exposure to commercial real estate adds more stress to their stability. Failing real estate can lead to failing banks. Which in turn, leads to a failing financial system and market collapse.
Future Looks Grim
Things won’t get easier for commercial real estate investors. New stricter regulations on being placed on small and medium-sized regional banks. Which means it is going to be harder to get loans. There is also no broad agreement on asset valuations. The price gap between sellers and buyers is growing. Determining the value of a property is becoming much more difficult. Some office-owners must refinance at a higher rate with only 50% occupancy. Cash flow is becoming increasingly negative.
Recession is only going to make matters worse. Occupancy will continue to decline as businesses cut back. And interest rates will keep increasing to stave off inflation. Commercial real estate owners are going to be squeezed.
There will be no relief from the Federal Reserve. Rapid interest rate hikes are a main factor behind the collapsing bank and commercial real estate sectors. Fed Chair Powell stated there is no clear plan to stop rate hikes. Instead, he said, “the banking system is strong, it is sound, it is resilient, it’s well-capitalized.”4
Real estate investors probably aren’t agreeing with Powell. Instead, they are seeing red explode across their balance sheets. Having another industry collapse on the heels of the banks and tech could send stocks into a downward spiral. When you factor in a looming recession, the time is now to move into safe haven assets. Contact us today at 800-462-0071 or through our site to learn how a Gold IRA can protect your wealth.
