KEY POINTS
- Many US office buildings remain empty as remote work trends continue, even three years after the pandemic began.
- In New York and San Francisco, less than half of the office spaces are occupied.
- Estimates suggest that vacant office space in New York City alone could fill more than 26 Empire State Buildings.
- Short-term bank loans finance many buildings, with approximately $1.5 trillion due by the end of 2025, potentially leading to a wave of loan defaults, according to analysts at Morgan Stanley.
- Resistance to returning to the office is widespread, with about one-third of eligible US workers opting to work from home full-time.
- If enough commercial defaults take place the situation may lead to more bank failures, or even a financial crisis.
Commercial Real Estate Crisis?
Some analysts believe a crisis is brewing in the American commercial real estate market. The “perfect storm” of remote work and soaring interest rates has sent shockwaves throughout the industry. Recent data reveals that office vacancies in the United States have reached their highest levels in decades, while rent delinquencies have experienced an alarming spike. With approximately $270 billion in commercial bank loans due this year, building owners find themselves desperately searching for tenants to avert financial disaster.
The city hit hardest by the commercial real estate turmoil, San Francisco, has seen vacancy rates skyrocket. Iconic mall operator Westfield and a prominent Hilton hotel have recently conceded defeat, closing up shop, and succumbing to the pressures of a market in distress. These closures serve as a stark reminder of the dire situation that many property owners face as they grapple with an oversupply of commercial space.
“Recent data reveals that office vacancies in the United States have reached their highest levels in decades, while rent delinquencies have experienced an alarming spike.”
Additionally, the retail shopping sector is also witnessing a wave of closures, with renowned brands like Nordstrom and Whole Foods shuttering their stores in urban shopping areas. These closures are attributed to declining sales in these regions and a distressing surge in retail crime. The combination of dwindling revenue and increased security concerns has forced retailers to rethink their brick-and-mortar strategies, adding to the prevailing sense of uncertainty in the commercial real estate market.
An abandoned Nordstrom in Richmond, Virginia.
Credit Card Concerns
Adding to the mounting concerns is the release of May’s credit card data, which indicates a rise in delinquencies that is inching closer to “normal” rates. The report suggests that consumers are facing increasing financial strain, potentially impacting their ability to meet various financial obligations, including real estate loans, consumer loans, leases, and credit card payments. The figures reveal the vulnerability of the overall economy, with a ripple effect on multiple sectors.
As the commercial real estate crisis unfolds, analysts are closely monitoring the impact on various types of loans and leases. The data for the first quarter of 2023 paints a worrisome picture. Real estate loans and consumer loans are at 1.22 and 1.73, respectively, indicating significant exposure in these sectors. Additionally, leases, credit cards, and other loans show notable levels of vulnerability, with figures ranging from 0.76 to 2.43. These statistics underscore the far-reaching consequences of the impending crisis, affecting both individuals and businesses across the nation.
Credit card loan delinquency rate over the past five years, without data from Q2 2023. Source: FRED
A Perfect Storm
According to Morgan Stanley, the convergence of remote work and surging interest rates has created a perfect storm for the US commercial real estate market. The high office vacancies, rent delinquencies, and impending loan maturities have set off alarm bells, while the struggles of retailers and consumers further compound the industry’s challenges. The ramifications of this crisis extend well beyond the real estate sector, potentially impacting the overall economy in profound ways.
Industry experts and policymakers are now faced with the urgent task of implementing strategies to mitigate the damage and prevent the crisis from escalating further. As the situation unfolds, stakeholders across the country will closely monitor developments, hoping for a swift and decisive resolution that safeguards the vitality of the commercial real estate market and promotes economic stability for years to come.
How to Trade the Commercial Real Estate Panic
This news is potentially bad for investors, but for options traders, this could present a myriad of potential trades. Bearish traders who accurately predicted the 2008 housing bubble (most famously Michael Burry of “Big Short” fame) were able to turn the market volatility into an opportunity. At Market Rebellion, we believe the best way to capitalize on potential market downturns is through options. Whether you’re making an outright bearish bet on a REIT stock (REITs are real estate investment trusts), or simply hedging your portfolio with SPY puts, there is an options strategy for you.
Not sure where to start? Talk to a professional options trader today to help figure out your strategy.
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