NEXT SHOE TO DROP COMMERCIAL REAL ESTATE?
The next crisis also won’t arise on money-center banks, either. Central banks have figured out how to bail out the banks, and have rebuilt the bank balance sheets by stripping hundreds of billions of dollars in interest from savers.
(Sorry, widows and orphans–your interest income had to be transferred to the big banks. We’re sure you understand why the banks are more important than you are as you enjoy yet another meal of canned beans and saltine crackers.)
The central banks and state treasuries around the globe may be confident they can bail out the banks, but what if the next domino to fall isn’t a bank? What if it is a “safe, high yield asset” held by institutional owners such as pension funds, insurance companies and REITs (real estate investment trusts)?
What if the next crisis isn’t a spot of bother caused by excessive leverage, but a systemic collapse of collateral as an entire sector–retailers holding millions of square feet of bricks-and-mortar store space–falls off a cliff
And these closings are likely underestimated, Staples, Office Depot and others have yet to announce the stores they will close this year.
Talk about an overvalued market set up for a fall. It isn’t just malls becoming empty retail wastelands–it’s Corporate America shifting to flex-work and work-at-home, slashing the need for floor after floor of costly business-park office space.
It’s about restaurants moving to smaller spaces as they move to serving more meals via delivery services.
Commercial real estate is grossly overbuilt in retail and office space. Combine sky-high valuations with cratering demand and billions in short-term CRE loans that must be rolled over into new loans, and we don’t have a liquidity crisis, we have a collateral crisis— the assets supporting the debt are no longer worth the loan balance.
Unless the Federal Reserve intends to buy up every dead and dying mall in America, this is one crisis that the Fed can’t bail out with a few digital keystrokes. Gordon T. Long and I discuss this brewing crisis and its potentially devastating consequences in our program Is Retail CRE The Next Financial Implosion? (YouTube)(34:12).
(some of the above courtesy of zero hedge.com)