- With almost $1 trillion in debt due this year, commercial real estate is being called a ‘ticking time bomb’
- The primary holders of CRE debt, more than 200 regional banks are in danger of collapse
- Physical precious metals, especially those held in a Gold IRA, can protect the value of your savings from the impact of a commercial real estate meltdown
Commercial Real Estate Risk Skyrockets
Commercial real estate, once seen as the bedrock of the American economy, is now being called a “ticking time bomb” as almost $1 trillion in loans come due this year. The collapse of the CRE sector would send shockwaves through the economy that could devastate savings.
The market is still reeling from record low vacancy rates and devalued buildings. Lower valuations make it harder for landlords to borrow money. Banks and property owners are now accepting that their buildings may never recover their pre-pandemic value. Fitch Ratings said office values have dropped 35% from their peak. Capital Economics predicted prices could drop another 20%. 1
Faced with this reality, office buildings are being sold off at staggering losses. One midtown Manhattan office building sold at a 97.5% discount in July.2
According to the Mortgage Bankers Association, about $930 billion in commercial real estate loans will come due this year. Commercial mortgages are typically set up with a balloon payment. This way, property owners only must pay the interest before the major payment comes due at the end of the loan. Typically, when rates were low, owners would just refinance and push the balloon payment down the road. But with interest rates being held higher for longer, that option is no longer feasible. Commercial real estate lending declined 47% last year. 3
At the same time, operating expenses have gone up dramatically. Owners are choosing to simply not pay back their loans instead of saving their properties with their own cash. About $95 billion of the US properties are in distress or at risk of becoming so. The office sector accounted for two-thirds of newly delinquent loans. In July, $1.9 billion in office loans became newly delinquent. 4
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Scott Rechler is the CEO of New York landlord RXR. He called the crisis a slow moving storm and said, “So at some point or another, the day of reckoning needs to come,” he added. “I think it’s here.”6
Rate Cuts Too Little, Too Late
The signal for lower interest rates may be too little, too late for the drowning commercial real estate sector. Fed Chair Powel says commercial real estate risk “will be with us for some time, probably for years.”
“Excessive exposure to commercial real estate remains a ticking time bomb within the banking system,” said Rep. Ritchie Torres (D-N.Y.). “An interest rate cut might ease the symptoms, but it will not cure the disease itself. ‘Extend and pretend’ can delay a crisis but it cannot make it magically disappear.”7
There is bipartisan support to make it easier to convert office buildings into housing. Solve two problems at once. However, the process is slow and expensive and not all commercial spaces can be converted.
Bond & Bank Worries
A secondary crisis is looming in the bond market. Many of the floating-rate loans were bundled into the $80 billion commercial real estate bonds and sold to investors. This may raise a systemic risk for banks issuing the bonds.
John Devaney is the CEO of the United Capital Markets hedge fund. He has the dubious distinction of being one of Time Magazine’s 25 people to blame for the 2008 mortgage crisis. He stated commercial real estate is a “slow moving train wreck” and the commercial bond market is in shambles. “The CMBS market is actually a disaster right now. Many things are unfolding right now and the bond pricing is telling us things are very, very bad,” the United Capital CEO said. He warned the collapse could ruin large downtown area that depend on tax revenue from office spaces. 8
The demise of the sector spells trouble for small and medium-sized commercial banks. They are being classified as “stressed.” Small banks have CRE loans values exceeding 158% of their risk-based capital. Midsize banks are at 228%. 9
A recent report stated that 282 of 4,000 US banks are on the verge of collapse. This is due to the double hit of maturing CRE loans and losses resulting from high interest rates. The same things that caused the catastrophic failures of Silicon Valley Bank, Signature Bank and First Republic Bank. Higher for longer interest rates have exposed the vulnerability of banks worldwide according to the International Monetary Fund.
Banking System Risks
If multiple banks try to raise capital at the same time, it could destabilize the banking system, similar to what happened in March 2023. Market volatility might lead investors to demand higher yields, driving up borrowing costs. A new recession could worsen the situation, causing widespread asset devaluation. Significant losses in commercial real estate loans could leave hundreds of small and midsize banks undercapitalized, with larger banks also at risk.
Conclusion
The growing risk factors facing commercial real estate are raising questions about how much longer the sector can go on. Insiders agree that a reckoning is on the horizon, the results of which could be catastrophic and ripple throughout the entire economy. The time to prepare is before the crisis becomes a reality. Physical precious metals, especially those held in a Gold IRA, can protect the value of your savings from the impact of a commercial real estate meltdown. Contact us today at 800-462-0071 to learn more about how to secure your funds.
