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Musk, Ackman and Chanos warn: this sector is next in line after the bank crash

Jamie Cameron
7. 4. 2023
4 min read

The $2 trillion U.S. commercial real estate market is shaking at its foundations. Interest rates are flying up, while values are down and a giant $1.5 trillion debt is waiting to be refinanced. Experts warn that the sector is headed for "real trouble."

Chanos, Ackman and Musk

Last year's rise in US interest rates has already sparked the biggest banking upheaval since the 2008 financial crisis. From top economists to Wall Street, a growing number of experts are warning that commercial real estate could be the next place where cracks appear.

High borrowing costs and tighter lending conditions caused by bank jitters could create hurdles for large property owners trying to refinance a pile of loans. Nearly $450 billion of commercial real estate debt is due to mature in 2023 alone.

Compounding the situation regarding the sharp rise in interest rates is the fact that office occupancy rates across the country are far from pre-pandemic levels, which is weighing on property valuations. Given this, the likelihood of commercial property owners defaulting on their debts is increasing.

It could be a perfect storm for America's already struggling regional banks. They hold nearly 70% of outstanding commercial real estate debt, according to BOFA!

Here are seven key comments on this issue from well-known personalities and companies 👇

Elon Musk, CEO of Tesla and SpaceX

"This is by far the most serious issue," he tweeted on Saturday. "Mortgages too." The CEO of Tesla, Twitter and SpaceX was responding to Kobeissi's letter, which highlighted that a record $2.5 trillion in commercial real estate debt is set to expire in the next five years.

"That's a real problem," Musk replied. "Many cities have high office vacancy rates. Mortgage portfolios are also at risk if housing prices drop significantly."

Bill Ackman, CEO of Pershing Square

"A lot of construction loans and real estate loans and small business loans are done by these smaller banks. Commercial real estate is an important part of our economy. If these banks lose all of their capital and deposits, it will cause a significant slowdown," Ackman said during an episode of the 20VC podcast.

Jim Chanos, the famed short-seller and head of Chanos & Co.

"Commercial real estate was a really attractive asset on the way up," Chanos said. "What we're dealing with is becoming in bad markets, bad credit markets, a really bad asset - and everybody forgets that," said short-seller and head of Chanos & Company. "Now there are so many moving parts underneath that surface that will affect valuations that you may not know about," he added.

Bank of America

"Commercial real estate is generally seen as the next sector to fall as lending standards for CRE loans tighten further," said Michael Hartnett of Bank of America.

JPMorgan

"We expect approximately 21% of outstanding office commercial mortgage loans to eventually default, with a loss severity assumption of 41% and a cumulative loss outlook of 8.6%... Applying an 8.6% loss rate to office exposure would imply losses of about $38 billion for the banking sector," JPMorgan said. "In addition, regional banks are much more stressed, which reduces their ability to amend and agree to loan modifications given the pressure on the liability side of the balance sheet," the bank added.

Scott Rechler, CEO of New York-based RXR Realty

"Commercial real estate debt is at $5.3 trillion. The bulk of this debt was financed when prime interest rates were near zero. However, this debt must be refinanced even in an environment where rates are higher, values are lower and the market has less liquidity," Rechler tweeted this week.

Adam Posen , US economist and president of the Peterson Institute for International Economics

"I think a big correction in commercial real estate is already underway," Adam Posen, president of the Peterson Institute for International Economics, said in an interview, adding that the commercial real estate sector is headed for "a real mess." "We haven't seen a smooth revaluation or a terribly transparent revaluation of mortgages and commercial real estate loans that are held with non-bank financial intermediaries," Posen said.

  • What do you think?
  • Do you see additional risks?

Please note that this is not financial advice. Every investment must go through a thorough analysis.


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