** Please note that any information shared in this public blog is NOT to be regarded as an advice or a recommendation, it is meant for EDUCATIONAL AND INFORMATION PURPOSES only and it does not constitute an investment advice, an offer or solicitation to purchase or sell the investment asset classes mentioned. **
Many people are eager to call the bear market and crisis “over” or even “resolved”, thinking that the worst is behind us.
But I have learned over my last 24 years in the financial market that the “next shoe” can take a lot longer to drop than most people think. Let’s go back to the 2008 Great Financial Crisis (GFC). The collapse of Bear Stearns came to a head in March 2008, though its troubles had begun a full 9 months earlier. The media was quick to call that situation “contained.” But then 6 months later — a period of time that feels like an eternity in the midst of a crisis — Lehman Brothers collapsed and triggered the wave of bank failures that really defined that crisis.
Today, I think the same sort of thing is shaping up in the U.S. commercial real estate and U.S. regional banking sector.
The current U.S. regional banking crisis began in March, with the high-profile failures of Silicon Valley Bank, Signature Bank and First Republic Bank. They brought with them a flurry of headlines, all of which have since passed as the media has now moved on to other hot stories, such as Artificial Intelligence, Chat GPT…etc.
However, I DO NOT believe we have seen the end of the U.S. regional banking crisis and that economic event is intimately intertwined with another brewing collapse in the U.S. commercial real estate, which has gone relatively underreported. Ironically or not, the same trigger that exposed the calamitous problems in the U.S. regional banks is also threatening commercial real estate investments across the U.S. — I am talking about the fastest and most aggressive rate-hike cycle in modern history. The Federal Reserve’s 500-basis point hike trashed the value of Silicon Valley’s “safe” assets (long-dated U.S. Treasury bonds) and it is now having the same effect on commercial real estate prices, from San Francisco to Boston and practically everywhere in between. Prices for U.S. commercial real estate fell in the 1st quarter of 2023 for the first time in more than a decade. The COVID-19 plandemic has had a significant impact on the sector, with remote working embraced by many companies.
A few of the highest-profile properties and operators have started making the news:
* Blackstone recently sold 2 office towers it acquired in 2014 for 36% less than it paid for them.
* Brookfield, 1 of the largest real estate companies in the world, recently defaulted on more than US$160 million worth of commercial real estate debt.
* Japanese investors in a San Francisco office building once worth US$300 million are looking to unload it for just US$60 million — an 80% hit!
Even Singapore listed Real Estate Investment Trust (REIT) investing in income-producing U.S. office real estate, such as Manulife US REIT and Prime US REIT are not spared.
What’s more, I believe these are only the early cracks, which will eventually give way to a larger and more widespread panic.
U.S. commercial real estate vacancies are now at a 20-year high. The amount of “distressed” commercial real estate debt — loans currently in default or close to it — is also at a 14-year high! We are looking at a tsunami of potential defaults as a full US$1.5 trillion of the US$1.9 trillion commercial real estate debt market — US$4 out of every US$5 on loan — is set to mature over the next 3 years. The bulk of those loans were originated when interest rates were near zero, now those rates are at least 5% higher (depending on the quality of the borrower)!
U.S. regional banks have originated TWICE as many loans on commercial properties as the “big” banks, like J.P. Morgan or Bank of America. That is why I do not think the crisis in U.S. banking stocks is over, especially with inflation still hot and bank bond portfolios still deeply underwater.
Do be prepared for the next shoes to drop – the U.S. commercial real estate and U.S. regional banks.
** Please note that any information shared in this public blog is NOT to be regarded as an advice or a recommendation, it is meant for EDUCATIONAL AND INFORMATION PURPOSES only and it does not constitute an investment advice, an offer or solicitation to purchase or sell the investment asset classes mentioned. **