The commercial real estate sector, destabilized by the Federal Reserve's fluctuating interest rates and ensuing loan defaults, is posing a grave threat to the U.S. banking system.
In case you've still got money in a bank, Bloomberg is warning that defaults in commercial real estate loans could "topple" hundreds of US banks.
Leaving taxpayers on the hook for trillions in losses.
The note, by Senior Editor James Crombie, walks us through the festering hellscape that is commercial real estate.
To set the mood, a new study predicts nearly half of downtown Pittsburgh office space could be vacant in 4 years. Major cities like San Francisco are already sporting zombie-apocalypse downtowns, with abandoned office buildings baking in the sun.
So what happened? In short, the Fed's yo-yo interest rates first flooded real estate with low rates and cheap money. Which over-built.
Then when the Fed panic-hiked interest rates in the 2021 inflation, that put trillions of commercial real estate underwater.
This could mimic last year's bank crisis, where falling bond prices panicked depositors. That crisis only stopped when Janet Yellen and Jerome Powell effectively bailed out every bank in America with sweetheart loans written on fictitious asset values along with unlimited taxpayer guarantees through the comically under-funded FDIC.
By the way, the FDIC is essentially guaranteeing over $20 trillion in deposits on just over a hundred billion. So they've got a half-penny on the dollar.
Without those government pre-bailouts, one paper last year by researchers at Stanford and Columbia estimated that 1,619 US banks -- about a third of them – could be at risk of failure.
The problem is nothing was actually fixed. In fact, it's getting worse. For the simple reason that as the months roll by there's more and more debt coming due.
And that brings us to Crombie, who notes that there's 9 hundred and twenty nine billion of commercial real estate debt coming due in the next 9 and a half months.
That's up 28% from last year, and it's getting bigger every day as banks pretend loans are still healthy by effectively adding missed payments.
We're starting to see glitches in the matrix; New York Community Bank just went through a near-death experience over its garbage portfolio of commercial real estate loans, dropping almost 80% before it was bailed out by vulture investors while the mega-banks hover like mega-vultures.
More will come. Potentially a lot more: a recent study from the National Bureau of Economic Research estimated that up to 385 American banks could fail over commercial real estate loans alone.
These would overwhelmingly be small regional banks, who typically hold a third of their assets in commercial real estate loans.
They hold so much because they know their local markets best, but the Fed poisoned that chalice by flooding easy money to developers.
For now we're only seeing the sickest banks dropping out of the herd. That could dramatically accelerate as that trillion plus in loans come due.
Commercial real estate delinquency rates have already jumped to 6 and a half percent – up 30% in a matter of months. Rates of distress in office loans just hit 11%.
When the smoke clears, we could lose dozens, even hundreds, of regional banks. Going by the last time with savings and loans, taxpayers ate 80% of the losses.
Meaning you could be on the hook for trillions, while the megabanks gorge on the carcass.
Slashing interest rates could staunch the bleeding. But with inflation marching up every month – currently at 5 and a half percent annualized -- that's not going to happen.
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Originally published on Profstonge Weekly
