2008 All Over Again? Commercial Real Estate Bubble About To Burst
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00:00 Picture this, over 1 trillion in commercial real estate debt is coming due in 2025.
00:08 Its vacancy rate reached 17.8% at the end of September.
00:13 And that's not all.
00:15 You've seen Mark Baum or Steve Eisemann as portrayed by Steve Carrow in the big short.
00:22 Now look what he's saying now.
00:24 I mean, do I think commercial real estate, well not commercial real estate, office real
00:30 estate is going to be a problem?
00:32 Yeah, we do.
00:33 I happen to think the whole banking sector is uninvestable.
00:36 Even Kevin O'Leary.
00:37 I'm just being honest with you that nobody's going to put money into a regional bank when
00:41 they know it could be one of the ones that goes to zero next week.
00:45 So why would you do that?
00:47 Commercial real estate and regional banks are a ticking time bomb that could be about
00:52 to explode.
00:53 Could this be 2008 all over again or even worse?
00:58 Demand for everything, retail, office, apartments, every aspect of real estate is going to get
01:03 whacked and I think we're just in the first inning.
01:05 Welcome back everybody to Benzinga where we level the playing field for all investors.
01:12 Today I will reveal what I feel is the next ticking time bomb in the financial world.
01:18 The regional bank exposure to the faltering commercial real estate market.
01:23 So let's paint the picture of how this started.
01:26 The seeds of the commercial real estate lending boom were planted back in 2008 when the housing
01:33 bubble burst.
01:34 I'm sure you've all seen the big short.
01:38 Predatory subprime mortgages, feverish speculation, and rampant fraud in mortgage-backed securities
01:46 ultimately triggered a massive foreclosure crisis.
01:51 Home prices plummeted, major banks failed, and the stock market plunged, wiping out nearly
01:58 $8 trillion in wealth.
02:01 It was the worst financial crisis since the Great Depression.
02:07 Things are normal.
02:08 Nothing's going on.
02:09 We don't see any problem.
02:10 And I turned to him and I said, "You will."
02:13 In response, the Federal Reserve took drastic action to save the banking system and the
02:19 economy.
02:20 They slashed interest rates to zero and unleashed a tidal wave of cheap money through quantitative
02:27 easing.
02:29 While necessary at the time, this flood of easy money had unintended consequences.
02:35 With mortgage lending now tightly regulated, banks and investors turned to commercial real
02:41 estate in search of higher yields.
02:44 So to lend to a bank, we simply use the computer to mark up the size of the account that they
02:49 have with the Fed.
02:50 So it's much more akin, although not exactly the same, but it's much more akin to printing
02:54 money than it is to borrowing.
02:57 And with interest rates so low, debt was cheaper than ever.
03:01 Lending for commercial properties like office towers, malls, apartments, and buildings absolutely
03:06 exploded.
03:07 Federal commercial real estate loans at banks more than doubled $1 trillion in 2015 to over
03:14 $2 trillion by 2022.
03:18 It was a speculative friendly not seen since the lead up to 2008.
03:23 And that brings us into today.
03:25 Fast forward to 2023.
03:28 Silicon Valley imploded almost overnight in a modern day bank run.
03:34 Their loans were too concentrated in risk startup investments.
03:39 When a few high profile startups failed, it sparked contagion.
03:45 Depositors rushed to pool their money on fears that SVB would collapse next.
03:50 The Federal Deposit Insurance Corporation rushed in to contain the damage, orchestrating
03:56 a takeover to avoid outright failure.
04:00 But immense damage was already done.
04:03 The bank's headquarters now sits empty in a ghost town of deserted cubicles and blank
04:11 screens.
04:12 SVB's demise also claimed Signature Bank and cast a pall on investments like Credit
04:18 Suisse.
04:19 Nervous customers fled banks with any type of risk.
04:23 What did this reveal to the concerned investors and bank customers?
04:28 This crisis revealed the glaring dangers of overexposure and the lack of diversification.
04:34 Yet many regional banks are making the same mistakes today with commercial real estate
04:40 concentration.
04:42 This all leads to the massive systemic problem in lending, which is already showing cracks.
04:49 In fact, around 15% of the US bank now exceeds the FDIC's recommendation concentration
04:56 levels for commercial real estate loans.
04:59 This almost doubles what it was two years ago.
05:02 The SVB implosion provided a warning.
05:06 Regional banks are skirting on the edge of their own abyss.
05:09 Did you know an estimated $1.5 trillion in commercial real estate debt is set to mature
05:16 by the end of 2025?
05:19 With rising interest rates, many property owners are finding it increasingly challenging
05:24 to refinance their existing loans.
05:27 So I'm sure you've had to refinance at some point.
05:31 Now picture this, instead of refinancing your $300,000 mortgage, you had to refinance billions
05:37 of dollars.
05:38 This is exactly what the bank and loan originators are facing today.
05:43 But here's the catch, the market's particularly shaky in the office sector.
05:48 With remote work becoming a norm, there's far less demand for office space today.
05:54 In some major city, vacancy rates are soaring causing office property values to plummet
05:59 by a staggering 27%.
06:03 Why does that matter and how could you get profit off this?
06:06 Let's go deeper into the numbers and answer the top two questions.
06:11 What type of bank has the most exposure and which banks have the most exposure?
06:18 With some eye-opening stats, regional banks have a whopping 55.5% of all outstanding commercial
06:26 real estate debt.
06:28 This is significantly higher than what is larger national banks have on their books.
06:34 When we talk about the overall exposure of commercial real estate lending, that of course
06:39 would include Wells Fargo around $154 billion, followed by the Bank of America at $75 billion.
06:47 Now what really matters is the size of exposure relative to banks balance sheet as the impact
06:53 of prolonged interest rates are hitting banks hard and property values are starting to decline.
06:59 Many loans will be underwater.
07:01 Get your pencils out now, this is where Money Mitch gives you the trading idea from the
07:07 video.
07:09 Of all the regional banks overloaded with risky commercial real estate debt, a few names
07:14 stand out especially vulnerable making them potentially short targets.
07:21 Let's focus on M&T Bank, MTB.
07:25 Based in Buffalo, M&T has an alarming $44.6 billion in total commercial real estate loans
07:33 equal to a massive 34% of their total lending portfolio.
07:39 Imagine if over one-third of your personal finances were tied up in your friend's struggling
07:44 restaurant or your brother's vacant office building.
07:49 This situation in MTB is exactly what they're facing.
07:53 It's not just M&T, Bank of Ozark and I'm not talking the one on Netflix, down in Little
08:00 Rock has gobbled up commercial real estate like it's an all-you-can-eat buffet at the
08:05 Bellagio.
08:06 These loans make up 61.4% of Ozark's total lending, leaving them hugely exposed to any
08:14 downturn.
08:16 As property values decline, these two regional banks are primed for significant losses.
08:22 Their extreme exposure relative to assets should put MTB and Ozark on every short seller's
08:29 radar.
08:30 MTB and Ozark are the dominoes posed to fall first, triggering a cascade of bank failures
08:37 across the region.
08:38 In summary, MTB and Ozark stand out as overexposed and vulnerable to the coming commercial real
08:45 estate slide.
08:47 Their lending behaviors may make them the next big shorts.
08:52 Before we continue, be sure to subscribe and like this video to stay up to date with the
08:58 latest insights and if you want to see more deep dives on topics in Wall Street you can
09:03 always add me @MoneyMitchBZ on Twitter.
09:07 But wait, there's more to this story.
09:09 If capital levels of these banks fall too low, some of them could become what we call
09:15 zombie banks.
09:17 Simply put, they won't generate enough income to stay afloat.
09:21 This is the sign that the major collapse has begun, but by this time the FOMO hits and
09:27 it will be too late for traders to chase.
09:29 I'm sure you're wondering why you think things will get this bad and calling me a
09:33 doom-sayer, but do you remember that savings and loan crisis of the 80s?
09:40 I'm sure not many of you do, but zombie banks back then, these banks took too risky
09:45 bets to recover profits, making the crisis even worse.
09:50 We all know how greedy banks can be and why wouldn't they, as they get bailed out nearly
09:55 every time.
09:57 Which puts in question, what are the rising credit risk?
10:01 Let's look at this story of Julie, a small business owner in Atlanta with 5 retail closing
10:07 stores in local malls.
10:09 She took out a $3 million adjustable rate loan in 2019 to expand improving stores, counting
10:17 on continued strong foot traffic.
10:20 But the pandemic turned malls into ghost towns overnight.
10:24 Then interest rates kept climbing on her variable loan.
10:28 As the Fed raised rates, monthly payments went from $12,000 to $22,000, almost double.
10:34 Julie cut expenses to the bone trying to keep up with payments, but with sales down 40%,
10:40 she had to close 2 stores entirely and last week she made the painful decision of defaulting
10:46 on the loan before bleeding her business dry.
10:50 Scores like Julie are becoming more common and showing the cracks that are in the commercial
10:56 real estate space.
10:58 Take a look at this graph as delinquencies on commercial real estate loans continue to
11:03 rise.
11:04 The overall CMBS delinquency rate sits at 4.25% as of August 2023, up from just 1.55%
11:14 before the pandemic hit.
11:17 Real estate delinquencies are up even more sharply, raising over 150% to 6.16%.
11:25 The falls are on the rise and regional banks highly exposed to commercial real estate looks
11:31 poised to take significant losses in the months ahead.
11:36 As we move forward the concern is what happens on the underwriting standards for refinancing.
11:43 Commercial real estate loans from 2018 and earlier with 5-7 years of maturity are now
11:50 knocking on the door for renewal.
11:54 Regional banks face years of pressure in this sector and it's not just from the percentage
11:59 of loans maturing soon.
12:02 To wrap it all up, regional banks are on shaky grounds as the commercial real estate sector
12:08 enters the distress mode.
12:11 This crisis could unravel over the next months.
12:14 Let's not forget how Michael Burry made his billions.
12:18 Michael Burry was actually early on the financial crisis which led him to start the bet in the
12:23 red until the house of cards started to fall.
12:27 From there things snowballed really quickly.
12:30 The clock is ticking on this commercial real estate bomb so I'm going to position my portfolio
12:36 defensively and capitalize on the impending slide.
12:41 Now the question is, you gotta ask, will you capitalize on this opportunity?