The U.S. commercial real estate market is on fire!

The U.S. commercial real estate market is on fire!

Commercial Real Estate (CMBS) Delinquency Rate, Highest in 11 Years!
The US commercial real estate mortgage (CMBS) delinquency rate soared to 10.7%.

This is the highest level in 11 years and is rising more steeply than the 2008 financial crisis.
Office-based CMBS is emerging as the biggest problem, and this crisis is not just a number, it is shaking the foundations of the market.

Why is it so gloomy?

1️⃣ Shadow of working from home
Since the pandemic, office vacancy rates have gone up all-time as demand for offices declines. No wonder it’s getting harder to repay loans.

Example:
More than half of San Francisco’s major office towers have gone vacant.

2️⃣ Interest rate bomb
The Fed’s interest rate hike has sent the cost of commercial loans soaring. The delinquency rate naturally rises as it becomes difficult to sell assets without paying interest.

Example:
Commercial building values in major U.S. cities are down 25% on average compared to before the pandemic.

3️⃣ Structural problems
Commercial real estate bondage (CMBS) used excessive leverage to chase short-term profits. Now, it is difficult to refinancing when loans expire.

Why is this scary?

•Financial system risk:
The default of CMBS is highly likely to be a fatal blow to banks that hold loans, especially small and medium-sized banks. The government should be wary of domino effect similar to that of the 2008 financial crisis.

• Serial bankruptcy:
  The possibility of CMBS-based investment products and funds collapsing due to rising delinquency rates.

Example:
A major private equity firm has lost three office towers in the past six months, handing them over to creditors.

Short-term Investment Strategy: Evacuate, Defend, and Hold Calm

1️⃣ REITs Caution:
Investing in commercial real estate REITs? Reduce the weight right now. Right now, this market is in perfect shape to be swept up in waves.

2️⃣ Defensive Portfolio:
Instead of real estate-related assets, focus on stable and defensive sectors. Examples: consumer staples, healthcare.

3️⃣ Keep an eye on promising opportunities:
Look for real estate opportunities that will be worth in the long run among the assets that have plummeted due to this crisis.

Bottom line: Don’t blindly trust the real estate market right now!

Beyond “American commercial real estate is in crisis,” it’s already here, not “crisis is coming.” Everyone looking into this market needs to cool down right now.

To say another thing:

In this situation, the person shouting, “This is an opportunity to buy at a low price” is a potential bankruptcy applicant. Don’t be greedy and keep things cool.

Summary:

•Situation: CMBS delinquency rate 10.7%, 11 year high.
•Causes: More telecommuting, higher interest rates, structural problems.
•Conclusion: Commercial properties are more likely to fail. Respond defensively.
•Strategy: Reduce REITs weight, move to stable sector, and explore cautious opportunities.

“Greed brings anger. Wake up and go safe, you X-Foot!”