The Commercial Real Estate Crisis Could Bring Down The Whole Economy
By Michael Snyder/Economic Collapse Blog February 10, 2024
Share this article:
Over the last several years we have seen commercial real estate values plummet dramatically all over the United States. One of the reasons why this is happening is because millions of Americans started working from home during the pandemic, and many of them never returned to the office once the pandemic subsided.
Another reason why this is happening is because there has been a mass exodus of businesses from our core urban areas. Conditions have rapidly deteriorated in many of our largest cities, and it is exceedingly difficult to run a profitable business in the midst of an environment of constant theft and violence.
Ultimately, it is very easy to understand why commercial real estate values have crashed, and they will almost certainly go even lower.
Needless to say, this is a very big problem for financial institutions that are sitting on lots of commercial real estate loans.
Many of those loans have already gone bad, and more are going bad with each passing day.
A commercial real estate crisis of epic proportions is already here, and we will see many financial institutions fail in the months ahead.
At this moment, New York Community Bancorp finds itself in the center of the storm. The bank's credit rating was just reduced to junk status, and it is desperately trying to reassure everyone that it is going to be able to survive...
New York Community Bancorp (NYCB) is attempting to reassure investors about its deposits, liquidity, and governance following a weeklong plunge in the company's stock and a decision by Moody's to cut the bank's credit rating to junk.
The $116 billion commercial real estate lender put out a press release just before midnight ET on Tuesday following the Moody's downgrade showing total deposits were up since the end of 2023 and that its total liquidity of $37.3 billion exceeded its level of uninsured deposits.
Of course the market isn't buying it.
Shares of New York Community Bancorp have been crashing, and they fell even more on Wednesday after the press release was put out...
The comments did little initially to lift a crisis roiling one of the country's top 30 banks that has deepened with each day.
Its stock has fallen by nearly 60% since it surprised Wall Street on Jan. 31 by slashing its dividend and reporting a net quarterly loss of $252 million. The price continued to slide by more than 13% after the market open Wednesday but that sell-off began to ease around noon.
Of course New York Community Bancorp is not the only institution that is hurting.
At this point, hundreds of U.S. banks find themselves in deep trouble, and banking stocks have been falling on a widespread basis over the past week...
The KBW Nasdaq Regional Banking Index, a collection of midsize bank stocks, has fallen nearly 12 percent in the past week as investors worry about lenders' exposure to commercial real estate loan portfolios.
Will the federal government soon feel compelled to intervene?
On Tuesday, Janet Yellen admitted to members of Congress that there is a problem, but see insisted that "it's manageable"...
US Treasury secretary Janet Yellen told lawmakers Tuesday that she had concerns about the exposure of some banks to commercial real estate.
"I believe it's manageable, although there may be some institutions that are quite stressed by this problem," she said.
Yeah, we'll see if they are able to contain the damage or not.
Interestingly, a key program that was put in place last year to prop up the banks is scheduled to expire on March 11th...
On March 11, the Fed's Bank Term Funding Program will stop making specially low-interest loans to distressed lenders. The program was established last year amid the collapse of Silicon Valley Bank to help lenders shore up their finances on the cheap, and restore the public's confidence in the wider banking system.
Meanwhile, the commercial real estate turmoil in the United States is also having a tremendous impact on banks on the other side of the planet.
For example, shares of the 16th biggest bank in Japan have been crashing because some of their U.S. office tower loans are going bad...
Just last week, Aozora Bank, the 16th largest in Japan by market value, saw shares crash after slashing the value of some of its US office tower loans by more than 50%.
In Germany, Deutsche Pfandbriefbank AG is now in very hot water due to commercial real estate loans that it has made in the United States...
The troubles in the US commercial property market, which have already hit banks in New York and Japan, moved to Europe this week, elevating fears about broader contagion.
The latest victim was Germany's Deutsche Pfandbriefbank AG, which saw its bonds slump on concern about its exposure to the sector. It responded by issuing an unscheduled statement Wednesday that it had increased provisions because of the "persistent weakness of the real estate markets."
Most Americans have never even heard of Deutsche Pfandbriefbank AG, but Germany's largest bank is very well known. And at this point, Deutsche Bank is facing enormous losses due to "potential defaults on its US commercial real estate loans"...
Germany's biggest lender Deutsche Bank said last week that it had allocated €123 million ($133 million) during the fourth quarter of last year to absorb potential defaults on its US commercial real estate loans. That's more than quadruple the amount it set aside during the same three-month period in 2022.
I have been watching Deutsche Bank for a long time.
Could it be possible that they are finally nearing a point of no return?
I believe that we are going to see so much financial chaos this year.
As I discussed yesterday, in such an environment it is wise not to put all of your eggs in one basket.
You don't want to wake up some morning and realize that all of your assets are trapped in an institution that has just failed.
If just a handful of banks fail as this crisis rolls along, the federal government will probably be able to handle that.
But what if dozens or hundreds of them start failing?
We are moving into unprecedented times, and during the years ahead we are going to see things happen that we have never seen before.
So enjoy the relative prosperity that we are experiencing today while you still can, because it will disappear way too quickly.
Originally published at The Economic Collapse Blog
