CRE (Commercial Real Estate) debt is a ticking time bomb for the U.S. banking/financial industry. It’s forming a perfect storm with serious implications for the Fiat Dollar. Here’s what’s happening:
- The FED has raised interest rates faster and higher that any time in history making CRE new loans far more expensive than a few years ago.
- Tennant occupancy and lease revenues are are at an all time low due to the new work-from-home business landscape reality today.
- As CRE Development and Property Management firms seek to refinance their properties, they no longer qualify for new loans due to the higher interest payments coupled with lower Tennant revenue streams.
- Banks are increasingly tightening their lending standards to prevent further erosion of bank stability and risk aversion.
- Many CRE properties will be forced into bankruptcy as loans dry up and foreclosures are ramping up each month right now.
- Pension and Insurance firms holding CRE bonds for revenue (liquidity to pay beneficiaries and claims) will come under increasing operational stress as all perfect storm above plays out.
- This will all culminate in U.S. Fiat Dollar weakness sparking a global fiat currency collapse.
U.S. CRE (Commercial Real Estate) assets grew to $6.0 trillion (23.0% of GDP) by the end of 2022. Life insurance companies hold 12% of that.
The U.S. Life Insurance sector holds about $900 billion, or 17% of their total cash and invested assets, in CRE – mostly in commercial mortgage loans (CMLs) and Commercial Mortgage Backed Securities (CMBS).
Over one-fifth of the industry’s total CRE exposure is to the office sub-sector, while another 16% is to retail.
Also, US Small Bank’s exposure to CRE has ballooned during the last few years. If CRE comes under stress as many fear, we will see a huge turmoil in the banking/financial sector.
There is growing concern over a potential commercial real estate (CRE) debt crisis that could trigger a collapse in the financial system and devalue the U.S. Dollar. While U.S. banks were viewed positively last year, the alarm has been raised due to smaller banks’ exposure to CRE, particularly commercial offices that have been financially impacted by the increase in remote work.
As downtown offices remain empty or underutilized, the value of office buildings is declining, and smaller banks hold a significant share of these assets. Unlike larger banks, which only have about 6% of their assets in CRE, many smaller banks have around 33% exposure to the sector. Small banks have historically faced challenges in commercial real estate, often leading to their failure. This creates additional stress on small banks and the associated risks to the economy. Banks are facing increased pressure to tighten credit standards while managing their declining CRE portfolios.
Furthermore, the Federal Reserve’s ongoing interest rate increases add to the concerns. While the decline in office occupancy hasn’t fully affected the CRE sector yet, many CRE loans are coming due in the coming months. This presents challenges for new lending and refinancing, as reduced rental revenues and higher interest rates for borrowing and refinancing pose significant obstacles.
The key problem is the potential impact of these risks on overall economic stability. Financial crises in specific sectors have historically spread through contagion to other sectors, causing dramatic economic pain. Past crises such as savings and loans, developing country debt, energy finance speculation, and the mortgage and securities crisis of 2008 have revealed the risks of speculative booms affecting the entire economy.
This time, the problem lies in a much larger financially driven crash associated with risky lending and contagion, primarily driven by small banks and CRE lending. If a contagion takes hold and spreads to other, already strained financial system sectors, the probability for a system-wide collapse increases exponentially. Then down goes the Fiat U.S. Dollar.
