Commercial Real Estate CRASH is Coming!! Why I’m Worried!

Which sector will be the Catalyst for The next Global financial crisis the Recent stress in the banking sector has Put the spotlight on Commercial Real Estate and it appears that this sector Is about to implode even if central Banks start cutting interest rates so Today I'm going to tell you everything You need to know about commercial real Estate including what it is who holds All the debt and what impact its Imminent collapse could have on the Housing market Let's start with a definition commercial Real estate is basically any real estate That isn't residential this includes Stuff like office spaces factories shops Hotels land and multi-family rentals Such as condos Now this is extremely important to point Out because not all commercial real Estate is created equal As a rule of thumb multi-family rentals Are the safest kind of commercial real Estate this is simply because Multi-family rentals like condos are Analogous to residential real estate Like Apartments There is always someone looking for Somewhere to live hence why both tend to Be safe Investments At the opposite end of the spectrum you Have office spaces which aren't always In high demand and are therefore higher

Risk the same goes for most of the other Kinds of commercial real estate this is Why investors typically split commercial Real estate into two categories Multi-family and everything else What's annoying is that most articles And reports about commercial real estate Don't make this distinction and I've Only seen a few which analyze each type Of commercial real estate individually This can make the headlines very Misleading so take all of them with a Grain of salt before you panic The same is true when it comes to Calculating how much of an impact a Commercial real estate implosion could Have on the economy consider that the Commercial real estate sector in the US Is worth over 20 trillion dollars but There's only around 5.5 trillion dollars Of commercial real estate loans now make No mistake that is still a sizable Amount especially because most Commercial real estate loans have Adjustable interest rates this means These loans become more expensive as the FED raises rates this is exactly what It's been doing over the last year and It's starting to hit the sector hard According to Morgan Stanley roughly 1.5 Trillion dollars of the 5.5 trillion Dollars of commercial real estate loans Will be refinanced at a higher interest Rate over the next year or so however

You'll recall that not all commercial Real estate is created equal and not all This debt is at risk of blowing up as You can see around 2 trillion of this 5.5 trillion dollars of debt is related To multi-family with the US government Holding almost 50 percent and Banks Holding over 30 percent The remaining 3.5 trillion is related to Everything else with banks holding Around 50 and insurance companies Holding over 30 percent now obviously It's that 3.5 trillion dollars of debt That's causing concerns this is Precisely because of its exposure to Banks and so-called Shadow Banks but I'll come back to that later first we Need to go back in time to before the Rate hikes began and see when this Sector started to experience significant Stress in a recent episode of block Works expert real estate investor Nick Hilaris recounted the roller coaster That commercial real estate experienced During the pandemic like many other Asset classes the sector initially Looked like it was about to get wrecked But it quickly recovered and went on to Hit all-time highs this makes sense Considering that Commercial Real Estate Investors of all kinds were able to Refinance their debts at much lower Interest rates Nick estimates that the Peak in commercial real estate was

Sometime in early 2022 everything was Looking good until the FED started Raising interest rates within a few Months of the First Rate hike the most Over leveraged Commercial Real Estate Investors went from making mad money to Being bankrupt Nick explained that the Rest of the industry took a wait and see Approach this meant eating the costs or Getting loan extensions from their Banks They figured that if they just waited Long enough then the FED would start to Lower interest rates again like it Always does and they'd be making big Bucks again Nick revealed that the Sector had the capacity to survive the Squeeze so long as the FED didn't raise Interest rates any higher than seven Percent but then the banking crisis Happened now if you've watched any of Our videos about the banking crisis You'll know that the rise in interest Rates caused large unrealized losses for Banks This could result in Banks going Bankrupt if all depositors try Withdrawing at the same time this is What happened to svb For the commercial real estate sector The banking crisis effectively removed The risk of the FED raising rates to Seven percent and replaced it with the Guarantee that banks will be less likely To lend to Commercial Real Estate

Investors in other words no more low Interest rate loan extensions from Banks If you're wondering why the banking Crisis makes Banks less likely to lend Two Commercial Real Estate Investors the Answer is because commercial real estate Loans are not liquid I.E not easy to Sell if the customers of a bank which Has these loans on its books try to Withdraw all at once then it could Easily go bankrupt but again not all Commercial real estate loans are created Equal as brutal as the banking crisis is Likely to be for the sector Nick is Confident that multi-family rentals will Be fine however he couldn't say the same About office spaces and specified that The wait and see period is coming to an End for that Niche this is mainly Because of the work from home Trend Which took hold during the pandemic this Trend has resulted in companies cutting Costs by exiting office spaces post Pandemic according to Nick the office Space market in Los Angeles is already Down over 40 percent and the crisis Hasn't even started yet So this begs the question of what will Happen when the riskier kinds of Commercial real estate get wrecked the Short answer is nobody knows because It's not entirely clear exactly who is Exposed to what recall that Non-multi-family commercial real estate

Debt is held primarily by Banks and Insurance companies As some of you may have heard between 70 And 80 percent of commercial real estate Loans come from small and medium-sized Banks the same kind of banks that are Currently experiencing Bank runs This is ultimately because large Banks Restricted real estate lending after the 2008 financial crisis According to Bloomberg 30 of office Space related loans come from small and Medium-sized Banks and the exposure Varies significantly by Bank This leaves seventy percent unaccounted For Although life insurance companies have Lots of exposure to commercial real Estate their office space exposure is Limited by my estimates life insurance Companies account for 10 of all office Space related loans this brings the Unaccounted debt down to 60 percent Now according to s p Global Wells Fargo Is the largest office space lender if my Calculations are correct this brings the Unaccounted office space debt down to 40 Say this makes me wonder if Wells Fargo Is the unnamed bank with over one Trillion dollars in assets that's at Risk of going under according to a Recent banking report more about that in The description I digress So who is holding the remaining 40 of

Office space debt well in short it's the So-called Shadow Banks for those Unfamiliar Shadow banks are financial Institutions that aren't Banks but Provide banking services these include Hedge funds private investment firms and Even some cryptocurrency exchanges The reason why Shadow banks are called Shadow Banks is because they operate With next to no oversight or regulation Like small and medium-sized Banks Shadow Banks became popular sources of funding After the 2008 financial crisis and They've been heavily involved in Commercial real estate Case in point private real estate Investment is extremely popular the Largest private real estate investment Firm is Blackstone which was buying Single-family homes during the pandemic Well it looks like Karma came back to Bite them because they defaulted on a Commercial real estate Loan in March the Commercial real estate Loan in question Consisted of office spaces and Retail Spaces in Finland now in case that Didn't make it clear enough Blackstone Has been having a hard time so much so That it's been preventing its clients From withdrawing their money for months Sound familiar Now you might think that this is no big Deal after all private real estate Investment firms cater to institutional

Clients and it's their own fault for Investing in Risky commercial real Estate when interest rates are rising Well what have I told you that you could Very well be the bag holder in this Equation in another episode of block Works expert Real Estate Investors James Davalos and Shalom Jacobs unpacked the Relationship between the shadow banking Sector and Commercial Real Estate they Explained that private real estate Investment firms are trying to avoid Marking their assets to Market in plain English they are trying to prevent any Selling because the value of their Assets would fall in line with the Public real estate market this Presumably means they're using their Commercial real estate as collateral for Loans being invested into other illiquid Assets If this situation sounds familiar that's Because it's not far off from what FTX Was doing with ftt to quickly recap FTX Used ftt its own exchange token as Collateral to take out loans and invest In other assets naturally ftt's value Was being kept artificially High by FTX Which collapsed after ftt crashed more About that in the description so who Exactly is investing in these private Real estate investment funds well According to James and shalom it's Primarily Pension funds and non-profits

This means that if there is a crisis in The shadow banking system due to Commercial real estate loans you could Very well be the one left holding the Bag James and Shalom warned that if the FED Doesn't start lowering interest rates by The end of the year then private real Estate investment firms will have to Start marking their assets to Market This will likely result in Pension funds Getting wrecked as the shadow leverage Unwinds and the FED will have to step in Here's where things get wild James and Shalom cautioned that most commercial Real estate loans in the US are Non-recourse what this means is that if A commercial real estate borrower Defaults on a loan they only lose the Property they don't owe the difference If the property went down in value Meanwhile the issuer of the loan takes Ownership of the property and swallows The loss if any Given the status of most office spaces Today a loss is essentially guaranteed To put things into perspective there are Estimates that office spaces will lose Half of their value in the coming years This is why nobody wanted to buy Signature Banks and svbs real estate Portfolios after the banks went under They don't want to be stuck with Worthless real estate and billions of

Dollars of losses on loans the FDIC has Since commissioned BlackRock to sell These commercial real estate loans to Investors something tells me that BlackRock is going to have an equally Hard time finding a buyer the fact that We're likely to see more commercial real Estate loans up for auction means that These properties will soon sell for Pennies on the dollar Shalom believes This will be a generational buying Opportunity Now this brings me to the big question And that's what the upcoming collapse of Non-multi-family commercial real estate Means for the housing market well the Answer depends on how the cookie Crumbles will Bank runs be the Catalyst Or will it be the leverage in the shadow Banking sector Let's start with the small and Medium-sized Banks as you watch this Video deposits are slowly being moved From small and medium-sized Banks to Larger Banks and into assets earning High interest like U.S government debt If this Bank Run continues then Commercial real estate could be in big Trouble That's because small and medium-sized Banks could start selling their Commercial real estate loans to honor Customer withdrawals this would cause The price of the related commercial real

Estate to crash which could cause issues In the shadow banking sector which could In turn cause housing to crash recall That private real estate firms like Blackstone hold lots of residential real Estate now this is something that the FED would presumably want to prevent Given that Pension funds would be hit The hardest by any contagion in the Shadow banking sector as such I suspect That the FED would set up a facility Like the bank term funding program or Btfp but for commercial real estate Loans This would allow small and medium-sized Banks to borrow against their commercial Real estate loans at their full value to Honor customer withdrawals this would be Nothing more than kicking the can down The road because some or even many of Those loans would be unpayable by the Original borrowers there could be Another option however In his interview Nick said that the Commercial real estate sector could Survive with interest rates below seven Percent so long as it continues to have Access to credit such as loan extensions The FED could somehow encourage Banks to Continue providing this credit this Wouldn't solve the slow-motion Bank Run Being experienced by small and Medium-sized Banks but it would prevent The commercial real estate sector from

Collapsing which would in turn prevent Issues in the shadow banking sector As far as I can tell that is the real Risk that the FED wants to avoid if the Shadow banking sector ends up being the First shoe to drop then it's unclear how Exactly the FED would step in providing Some sort of special lending facility For Wall Street firms would be very bad Optics it would look like a 2008 style Bailout all over again and that's Probably what it would be in practice But allowing the shadow banking system To collapse doesn't seem to be an option Either because then pensions would get Wrecked and the regular housing market Would get hit too the cost of keeping Pension solvent would also probably be Exponentially larger than insulating the Shadow banking sector This is why I think the FED will come up With a different solution and it's Possible we're seeing it play out Already remember how the FDIC Commissioned BlackRock to find a buyer For the commercial real estate loans From Signature Bank and svb that nobody Wanted to buy Well I think BlackRock may buy This is because commercial real estate Like office spaces can be converted into Multi-family rentals and residential Real estate the caveat is that this can Be quite expensive to do by some

Estimates it can cost as much as Building a new building to convert Offices into Apartments the thing is That the cost of this commercial real Estate is almost certainly going to Crash and it could crash low enough that It becomes economically viable to go Ahead with such conversions Alternatively the government could give Incentives to investors to acquire and Convert all this commercial real estate This is where things could get seriously Dystopian a recent report by consulting Firm McKinsey made recommendations for These kinds of property developers one Of them is quote embed digital Solutions And advanced analytics in everything not Just by sporadically adopting individual Solutions now if I was to put my tin Foil hat on I would say that McKinsey is Recommending that property developers Convert office spaces into Smart City Compatible condos and apartments if you Watched our video about smart cities You'll know that sustainability is the Justification for this setup which McKinsey also cites in its report I Could well see an ESG obsessed Institutional Investor like BlackRock Bankrolling this kind of real estate Assuming they don't already own it I Could also see ESG obsessed governments Like those in the European Union Bankroll this kind of real estate and

Could easily see the these governments Owning it too Anyway speculation aside conversions Will happen and this will cause housing Prices to drop due to the increase in Housing Supply now this will happen Slowly in areas with new office spaces Because full conversions will be Required and quickly in areas with old Office spaces since they used to be Residential as a quick anecdote one of Our team members was in a small European Town recently and noticed that vacant Retail and office spaces were also being Offered as condo and apartment rentals Again this is because these retail and Office spaces were originally Residential so they're easy to convert Back by contrast the coinbura HQ here in Dubai has always been an office space so It's missing the pipes and wiring Required for things like showers and Household amenities it's safe to say That the cost of this building would Have to fall quite a bit to justify Converting all these office spaces in to Apartments In some then if interest rates don't Come down soon then the commercial real Estate sector will crash even if rates Do come down some niches like office Space are still doomed regardless the Outcome will be an increase in this Supply of housing which will bring costs

Down and possibly result in a housing Dystopia the craziest part is that we Predicted this almost a year ago you can Check out that video in the description And that's all for today's video If you Enjoyed it folks smash that like button And be sure to subscribe to the channel And ping that notification Bell so you Don't miss the next one if you feel this Information is important take a second To share this video with any relevant Friends and family members If you want to support the channel while Saving money check out the coin Bureau Deals page to get massive discounts on Hardware wallets and thousands of Dollars of trading incentives on the top Cryptocurrency exchanges the link will Be down in the description you can't Miss it thank you all for watching and I Will see you next time [Music]


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