Commercial Real Estate Is About to Slide into an Abyss… And Take the Market with It

Shah Gilani|June 14, 2023

Enjoy the new bull market while it lasts, which won’t be long, because crashing commercial real estate (CRE) is going to sink banks, throw the economy into recession, and kill the stock market rally.

Betting against one slice of the $21 trillion commercial real estate market, shopping malls, initially hammered by the switch to online shopping then laid to rest by pandemic shutdowns, made a handful of savvy traders billions of dollars.

Now traders betting against the much larger office slice of CRE are raking in profits as prices of office buildings tumble in the face of rising vacancy and interest rates.

But what’s been made so far, mostly by shorting pools of securities and through exotic derivatives plays, is a drop in the bucket compared to the money that’s about to be raked in on the final nail getting hammered into CRE’s coffin.

Only this time, everyday retail traders and investors can get in on the action, because this go-round, there’ll be dozens of ways to make multiple fortunes on crashing CRE.

The crash has started, it’s just been a slow-motion crash so far.

That’s about to change…

First, we saw shopping malls shut down, then offices abandoned during pandemic lockdowns. Now we know online shopping is our future and work-from-home is the new normal. Those paradigm shifts saw the lid close on CRE’s coffin.

It’s Coming to a Head Now

Higher interest rates are nailing it shut.

With interest rates going up from zero to 5.25% in a little over a year, and that’s the fed funds rate, not the interest rate CRE borrowers pay, and banks tightening their lending standards, especially on leveraged real estate loans to landlords whose rent rolls have rolled over, refinancing maturing loans will end up being somewhere between inordinately expensive and impossible.

The Chief Investment Officer of Morgan Stanley’s Wealth Management unit says in the face of almost $1.5 trillion of commercial mortgages needing to be refinanced over the next 24 months, “office and retail could ultimately plummet 40%.”

Fitch says 35% of some $5.8 billion in CMBS coming due in the next few months will not be able to be refinanced. That means there will be defaults and marked-down asset sales, leading to lower and lower prices.

Offices are now experiencing record vacancies. More than 13% across the country. But that’s an average. In some cities like New York, San Francisco, Denver, and Los Angeles vacancy rates in some office buildings is closer to 40% to 50%. Some buildings are totally empty, abandoned since the pandemic.

Looking at those vacancy rates and CRE prices dropping, Tesla Inc. (TSLA) CEO Elon Musk just exclaimed, “Commercial real estate is melting down fast.”

Billionaire real estate entrepreneur Jeff Greene, who made his first fortune shorting subprime residential mortgage-backed securities in 2008, when asked on Fox Business News if the CRE crisis is past, answered, “Not even close.”

You won’t believe who has been walking away from buildings because they can’t refinance them. Institutional investors, REITs, private equity players have all handed over keys to lenders on office buildings they’ll never make money on.

I’ll tell you who and what where some of the properties are in the report I’m releasing. I’m putting the final touches on the presentation as I write this.

And I’ll tell you how the small and regional banks that hold 80% of the CRE loans and mortgages coming due are going to fare when the trickle of defaults turns into a tsunami.

Newsflash: They’re going belly-up.

And that’s going to shake out weak links in a handful of other sectors hanging onto CRE that’s about to go over the cliff.

Crashing CRE, failing banks, imploding sectors that support commercial real estate, are going to crush the stock market rally.

But the thing is, while that’s all frightening, it’s also a tremendous opportunity. You’ve been reading about that over the past few days here.

Fortunes are about to be made on all this happening, I’m playing it and I want you in, too.

Be on the lookout for tomorrow’s post. You’ll have all my research and an action plan to follow.