The commercial real estate crash is happening.📉
Values for office, retail, and apartment buildings are already down -11%.
Morgan Stanley thinks values could crash -40% when all is said and done.
Big problem for US Economy. pic.twitter.com/iA64qrjfsS
— Nick Gerli (@nickgerli1) July 10, 2023
2) We're already seeing owners of office buildings, malls, and apartments "walk away" from their properties.
And had back keys to the lender.
In some cases, the values have gone down 50-60% below what they paid for the property. pic.twitter.com/vCh465ilRw
— Nick Gerli (@nickgerli1) July 10, 2023
4) But it's not just office buildings.
Apartments are also getting hit hard, with values down -12.5% over the last year (the highest of any commercial asset class) according to MSCI.
Lower rents and higher vacancy rates doing damage. pic.twitter.com/TOlJeuuoq1
— Nick Gerli (@nickgerli1) July 10, 2023
6) Small banks hold so many commercial real estate loans that they account for an insane 37% of their deposit base.
$1.9 Trillion CRE Loans / $5.2 trillion Deposits.
No other loan type comes even close. pic.twitter.com/PB2avs5PkQ
— Nick Gerli (@nickgerli1) July 10, 2023
8) This could cause a worsening credit crunch in H2 2023 and 2024, where small banks especially are forced to cut bank on lending.
I also wouldn't be surprised if there's more bank failures once the losses on CRE debt become clearer to depositors of the impacted banks.
— Nick Gerli (@nickgerli1) July 10, 2023
10) For comparison, back in 2007, there were $1.3 trillion subprime loans in the US. That brought down the banking system & economy.
Meanwhile, banks hold $2.9 trillion in CRE loans today (with trillions more in CRE debt floating around in CMBS and private issuances). pic.twitter.com/KxsoVSkQC7
— Nick Gerli (@nickgerli1) July 10, 2023
12) Office and apartment owners borrowed money on their property when short-term US Treasuries were less than 1%.
Now these loans need to be financed with treasury rates north of 5%.
And quite simply – the properties don't have the income to pay it. pic.twitter.com/MnagRLHtOQ
— Nick Gerli (@nickgerli1) July 10, 2023
14) Those super low cap rates worked when interest rates were low.
5% return compared to 3.5% interest cost makes the owner money,
But now the return is 5% compared to a 6.5% interest cost.
Meaning the owner loses money.
— Nick Gerli (@nickgerli1) July 10, 2023
16) What will happen next? And how bad will the downturn get?
Read about it for free on the Reventure App blog. t.co/RYAWrsLV12
— Nick Gerli (@nickgerli1) July 10, 2023