Real estate market including apartment buildings even smaller multi-families industrial retail and most heavily impacting Office Buildings and we have new evidence as well at this credit event the lack of liquidity in the banks is now already spilling over to Residential Mortgages and if you’re not a subscriber of this channel yet press
Subscribe join us because we are on the verge of a massive reset in real estate and if you’re in the commercial game right now I hope you locked in your rates and if you’re not get ready because we are about to see a flood of deals come forth in all aspects of
Commercial real estate including multi-family Apartments so what exactly is the size and scope of the issue here well according to Goldman Sachs we are looking at over 5.6 trillion dollars of outstanding commercial and multi-family mortgages in the U.S now excluding collateralized properties there’s about 4.5 trillion of outstanding commercial multi-family mortgages throughout the
U.S real estate market and Banks account for around 40 percent of this overall at 1.7 trillion dollars and you could see the breakdown right here take a look at this for the office segment the most vulnerable of all cre within U.S banks regional and local banks account for 62
Percent of lending while National large Banks com uh comprise the remaining 38 that is just for Office Buildings not other types of cre and why is the office sector the most vulnerable the reason’s twofold first take a look at the current office occupancy level sits at just
Under 50 percent that means that half of your doors are vacant that is what you call a white elephant asset folks an anchor ass an anchor that has to be cut and the office sector in general has structural issues as well bad long-term prospects in the office space game and
Who holds the majority of the debt local domestically chartered Banks account for the Lion’s Share of these loans and wait till you see the breakdown for Residential Mortgages even I was surprised now watch this in 2023-24 about 1.1 trillion of debt is maturing and looking at this 1.1 trillion dollars
Of debt maturity by property type office loans account for around 23 percent multi-failings account for around 31 followed by about 10 for each industrial retail and hotels now enter Residential Mortgages your typical 30-year fixed mortgage the cream of the crop for the residential housing market which I talked more about this morning on
Twitter actually so if you’re not already following me there you should by the way but if you’re not take a look at this table that Goldman put together for Home Loans this is important okay large Banks account for 41 of all mortgages mid-sized banks for 14 and small Banks
Account for 45 of all home loans in this country which means like we’ve been saying close to half of all residential lending is being temporarily frozen out small banks have no liquidity no appetite for risk are lending from the fed’s discount borrowing window for purposes of staying solvent and being
Liquid enough to actually pay out their withdrawals the credit markets are tighter right now than we’ve seen in 15 years since the aftermath of 08 and what we’re looking at right now right here is the lending standards running up to this credit event lending standards tightening what that means is how easy
It is to get a loan approved how easy it is to find a bank to dish out the money you know for a mortgage we get this data directly from loan officers themselves it has nothing to do with slowing a business which I saw someone commented
About in a past video it has to do with credit availability drying up and when we get the next sluice report on May 1st this line is expected to to reach 2008 levels which saying that that would be catastrophic for housing would be an understatement that would rein in the
Next real bear market for housing and what I want you to listen to is Jerome Powell talking at his last press conference about this he actually mentions this multiple times specifically saying that with how fast credit is tightening right now they may not even have to do more rate hikes
Because the credit markets themselves will take care of the rest of this for us take a listen to what he said looking for purposes of our monetary policy tool we’re looking at what’s happening among the banks and asking is there going to be some tightening and credit conditions
And then we’re thinking about that as effectively doing the same thing that rate hikes do so in a way that substitutes for rate hikes so the the key is we have to have policies need got to be tight enough to bring inflation down to two percent over time it doesn’t
All have to come from radox it can come from uh you know from tighter credit conditions so that we’re looking at it and we it’s highly uncertain how long the situation will be sustained or how significant any of those effects would be so we’re just going to have to watch
Financial conditions seem to have tightened and probably by more than the traditional indexes say because the traditional indexes are focused a lot on rates and equities and they don’t necessarily capture lending conditions so when he says that understand the consequences of available credit drying up to this scale can’t be
Overstated we’re talking hard hard Landing here folks the entire U.S economy is propped up by debt in the last few years were juice to the Moon okay credit was so easily accessible it acted like Rocket Fuel and all these businesses who grew over the last few years expect a massive shrinkage event
To take place over the next six months and the companies that are weak the weakest amongst us will be plucked out and go under which if you’re a home buyer this is technically a good thing for the housing market but the pain won’t stop at housing so be warned okay
Now how fast will this start to happen how fast will the cre Market specifically begin to unravel well here’s what Goldman has to say about this office delinquency rates and their path cmbc delinquency rates in the office segment have started to tick up but are well below great financial
Crisis levels looking forward though we expect cmbs delinquency rates in the office segment to increase meaningfully remember folks investors only make money buying cmbs if if the loans are paid out in full over the full length of the loan if the borrower decides to pay off the
Loan early or in this case the borrower defaults on the loan the investor of the cmbs loses loses big and that’s what Goldman’s referring to here let’s keep going a key question we we received from investors since we published our CD our cre report pertain to the level of
Delinquency rates that can be expected in this cycle especially as it took office delinquency rates four years to Peak during the great financial crisis while the unemployment rate a key driver for higher offer higher office delinquency rates during the great financial crisis is much more benign
Right now at least at the moment but we think the rate of increase in this cycle would be much more pronounced given the sharp increase in interest rates in recent quarters versus interest rates that were generally moving lower between 2008 and 2012 and structural headwinds associated with the office asset class
As around 1.4 billion square feet of office space will be considered obsolete by 2030 indicating a large inventory downsize in class B and C Assets Now we can visualize just how bad this is really going to be take a look at this chart what you want to focus on here is
Comparing right now at the far right side of this chart versus what we saw back in 08 the dark blue line is office delinquencies and the light blue line is the interest rate on the 10-year back in oh wait we saw around a 10 percent delinquency rate for Office Buildings at
Its peak pain point now we’re expecting possibly as high as 20 percent majority from class B and Class C which make up more than 60 percent of total Office Inventory in the U.S commercial real estate market now take a look at this here are some of the largest loan
Defaults that have already happened just recently and these aren’t small loans in any stretch of the imagination we’re talking projects that defaulted on loans from in the hundreds of millions to even up to 1.7 billion dollar mortgages three massive defaults from Blackstone totaling around a billion dollars we have two Brookfield office building
Projects totally around 800 million dollars take a look at this one Columbia Property Trust office building package of seven buildings three in Manhattan two in San Fran one in Boston and one in Jersey City coming to a total default on their 1.7 billion dollar mortgage and there’s more where this came from folks
They are happening every day now from small apartment buildings to large Office Buildings and the reason is because it’s just way more expensive to reset your loan right now and cre usually uses floating rates to secure financing floating rates that reset annually and remember there’s 1.1 trillion dollars of cre loans scheduled
To reset over 2023 and 2024. you can get a sense of just how dire the situation is with this chart this is only the cmbs portion of the 1.1 trillion by the way the dark blue shading is the portion of total loans with floating rates versus
Fixed rates you can see it’s a large majority and these companies would rather default than rework the terms of the loan it’s cheaper for them to give the property back to the bank and just say keep it it’s yours we played you the interview of Ben Mala in a recent video
Explaining his situation and how his rates just got reset and resulted in him now having to dish out six Mill a year more in interest and if you’re wondering why these companies are so quick to default on their loans well the reason they can do that if you’re in real
Estate you already know this but it’s smart business to always form a new LLC or a new legal entity for each one of your properties even small Real Estate Investors do this it’s even smart to do it with your personal house to be honest so if one of your property ends up going
Under it won’t affect the rest of your business
