The Meltdown of Commercial Real Estate – Peter St Onge 3/25/24


In case you’ve still got money in a bank, Bloomberg is warning that defaults in commercial real estate loans could “topple” hundreds of US banks.
Leaving taxpayers on the hook for trillions in losses.

The note, by Senior Editor James Crombie, walks us through the festering hellscape that is commercial real estate.

To set the mood, a new study predicts that nearly half of downtown Pittsburgh office space could be vacant in 4 years. Major cities like San Francisco are already sporting zombie-apocalypse downtowns, with abandoned office buildings baking in the sun.

So what happened?

The Fed’s yo-yo interest rates first flooded real estate with low rates and cheap money. Which were overbuilt.

Then came the lockdowns, which forced millions to figure out new workday patterns. People liked foregoing the long commute (not to mention the free money). Despite every effort, downtown businesses have not been able to get all workers back.

These days, everyone talks about hybrid models of working, some in-person and some remote. But judging from observation, remote is winning. In any case, even a 30 percent reduction in the footprint of office space once the leases are renewed could topple the entire sector.

The restaurant and retail sectors of downtown feel the pinch, with more closures all the time. Adding to the pressure are absurd levels of inflation and ever-riskier streets on matters of personal security. Put it all together and there is ever less reason to slog to the office.

When the Fed panic-hiked interest rates in the 2021 inflation, that put trillions of commercial real estate underwater even without other factors. Add to that crime, inflation, plus remote work, and you have a dangerous mix that could toppled cities as we know them.

This could mimic and elaborate upon last year’s bank crisis, where falling bond prices panicked depositors. That crisis only stopped when Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell effectively bailed out every bank in America with sweetheart loans written on fictitious asset values along with unlimited taxpayer guarantees through the comically underfunded FDIC.

By the way, the FDIC is essentially guaranteeing over $20 trillion in deposits on just over $100 billion. So they’ve got a half-penny on the dollar….

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