The commercial real estate (CRE) market stands on the precipice of a monumental crisis, with both small and large banks teetering on the edge of financial instability.
The revelation that CRE troubles extend beyond small banks to major financial institutions is deeply concerning. Despite the sector’s smaller proportion of large banks’ balance sheets compared to pre-pandemic levels, the challenges persist, pointing to systemic issues rather than temporary measures.
The spike in delinquency rates for mortgages in Commercial Mortgage-Backed Securities (CMBS) mortgage pools, soaring to 5.1%, sends shockwaves through the financial sector. The once-reliable office sector now languishes as the worst-performing segment in CMBS, surpassing retail and lodging in its decline.
Office availability rates paint a grim picture, with some cities witnessing availability rates of 30% or more, signaling a structural crisis as Corporate America reevaluates its real estate needs.
As the CRE market spirals into turmoil, the specter of financial collapse looms large. The implications are dire, with potential repercussions reverberating throughout the economy. The time to address these challenges is now, for the fate of the financial sector and the broader economy hangs in the balance.
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Worth noting that although the CRE mess is way worse at small banks, large banks aren't immune – CRE is a smaller percent of their balance sheets relative to start of '20 b/c they've picked up so many other assets, not b/c they sold off all their CRE loans when Covid hit: pic.twitter.com/61w4KkZtka
— E.J. Antoni, Ph.D. (@RealEJAntoni) May 6, 2024
Commercial real estate is headed for a major reset. There are multiple reasons for this:
(1) Companies are fleeing big blue cities like LA, SF, and Seattle. Due to high crime and high cost of living.
(2) COVID has caused companies to transition workers to more remote working.…— Dorene Brown (@DoreneBrow9456) May 5, 2024