Do This Before Commercial Real Estate’s $155 Billion “Debt Bomb” Explodes

Shah Gilani|June 23, 2023

That sound you’re hearing isn’t just me pounding the table about trouble in the commercial real estate space. It’s actually the echo of implosions happening around the country as landlords and CRE borrowers default on loans and mortgages, and valuations of suddenly for-sale distressed properties hit the floor.

It’s time to run. I’ve been talking about this for weeks now – if you’re not already out of your failing CRE investments, you should be. The keys to more office towers and buildings, retail centers, malls, industrial parks and apartment buildings are being flipped back to the banks and lenders who will then have to sell them at rock-bottom prices.

If there’s anyone willing to buy them, that is.

And when that selloff happens, the soon-to-be-flood of troubled, potentially distressed, and distressed CRE properties coming to market will implode not only all commercial real estate, but banks and pensions, and private equity companies, and maybe the economy and market too.

It’s a long process. The overhang of distressed properties will only grow over the next few years and by some accounts may not be cleared out until maybe 2040.

That’s bad for a lot of people but good for everyone who knows how to play it. I want to make sure you’re one of those people.

And to be clear, this “debt bomb” is big. I’ll show you how big in just a second, and I’ll lay out the two things you can do right now to make sure you’re in a position to profit from the fallout.

The Troubled and Distressed CRE Market in a Nutshell

Bloomberg just published another article about mounting mayhem in commercial real estate. In it they point to $1.4 trillion in CRE loans potentially coming due by next year. But they didn’t say where that staggering figure came from.

So, I did what I do. I researched where that number could have come from.

It came from the Mortgage Bankers Association, which is frightening, because they would know. It’s their members and constituents who made most of those loans and mortgages, or securitized and packaged them, or sold them, or probably all of the above.

An increasing number of those loans and mortgages are labeled “troubled assets.” So-called troubled assets climbed 10% to $64 billion in the first quarter of 2023, according to MSCI Real Estate.

More to the point, the report says there’s now “nearly $155 billion in potentially troubled assets,” of which retail property including malls are the most troubled with $23 billion “distressed,” and at least $18 billion of office real estate accounting for the other $43 billion of potentially distressed assets surfacing in the first quarter.

So, what does “distressed” mean? And what’s the difference between troubled and potentially distressed?

To be clear, there is no investment definition of “troubled.” Different analysts use the term to mean “heading towards being potentially distressed,” or it can mean “distressed.”

“Potentially distressed” generally means the property is facing delays in reselling or leasing, or has debt that’s on a CMBS (commercial mortgage-backed security) watchlist, is in forbearance or delinquent.

According to EquityMultiple, “A distressed asset refers to an investment in real property that is priced below market value-typically due to solvency or cash flow issues on the part of the asset’s current operator, manager, or owner.”

But there’s more to it than that. A distressed property can be in bankruptcy, in default, under court administration, in liquidation with “significant tenant distress,” or that have CMBS transferred to a special servicer.

The bottom line is, $155 billion in CRE assets are in big trouble or the biggest trouble.

The echo of implosions we’re all hearing are valuation drops as borrowers hand over keys to lenders because they don’t want or can’t borrow any more money to keep the property, and lenders who don’t want to or can’t carry those properties on their own balance sheets look to sell them, at you-guessed-it, distressed prices.

Earlier this year Brookfield and Blackstone and PIMCO handed over keys of big properties to their lenders and banks, meaning they defaulted on loans. And these some of the biggest big boys in the investment world.

Park Hotels & Resorts Inc. just stopped paying $725 million in debt it owes on two of the biggest hotels in San Francisco, the Hilton San Francisco Union Square, the biggest hotel in San Francisco, and Parc55 San Francisco.

The Westfield San Francisco Centre, located in the Union Square neighborhood, and the biggest shopping mall in San Francisco just handed over keys to the property to holders of Centre’s $588 million mortgage.

And Wells Fargo just sold a 13-floor office building at 550 California Street in San Francisco for about $200 a square foot. That property was valued at $1,000 a square foot in late 2019.

This is just the start of it. Like I said above, we could be looking at almost twenty more years of this. Now’s the time to start setting yourself up for profit.

Two Things You Need to Do Right Now

The first is this: any banks that have massive exposure to CRE loans are ripe targets for downside plays. If you want to hit a bunch of them at once, the best target is the SPDR S&P Regional Banking ETF (KRE).

KRE holds a large portfolio of regional banks, a sector with an oversized debt burden in commercial real estate and one that isn’t “too big to fail” like national banks are. You can hit KRE with puts and put spreads all day long, over and over again, because it’s not nearly done going down.

The second is that you need to check out the full briefing and action plan I’ve put together. It targets all the sectors who are going to feel the pain in this debacle – banks, lenders, construction companies, even insurance firms. Every time real estate has taken a dive like this, savvy investors have made fortunes in record time, and because we know this is coming, we have an opportunity to potentially join them.

Get all the details here.