Dark clouds are forming over the U.S. commercial real estate market.

Published 7:02 am Tuesday, July 11, 2023

It was only a month ago that Elon Musk tweeted “Commercial real estate is melting down fast.”

Musk had alluded to the possibility that commercial real estate was edging over the cliff earlier than that.

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“We really haven’t seen the commercial real estate shoe drop,” Musk said in an April interview with former Fox nighttime host Tucker Carlson. “That’s more like an anvil, not a shoe. So the stuff we’ve seen thus far actually hasn’t even — it’s only slightly real estate portfolio degradation. But that will become a very serious thing later this year, in my view.”

New data rolling in this week shows Musk was right on the market on commercial real estate trends.

“The commercial real estate crash is happening,” tweeted Reventure Consulting CEO Nick Gerli on July 10. “Values for office, retail, and apartment buildings are already down -11%. Morgan Stanley thinks values could crash -40% when all is said and done. (It’s a) big problem for the US Economy.”

A massive wall of commercial real estate debt is imminent, and the prospects for it all being paid off are highly questionable, according to Gerli.

“The problem is that there is a $1.4 trillion “Wall of Commercial Debt” coming due in the next couple of years,” he tweeted. “Most of this debt is held by banks. And a lot of it will go into default and be foreclosed.”

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Office building owners may trigger the next set of dominos to fall.

“We’re already seeing owners of office buildings, malls, and apartments “walk away” from their properties and hand back keys to the lender,” Gerli added. “In some cases, the values have gone down 50-60% below what they paid for the property.”

Office buildings “are going to get hit especially hard, because work-from-home has lowered occupancy rates,” Gerli tweeted. “Meanwhile, interest rates have doubled over the last years, meaning owners who need to refinance are now losing money on their property.”

A downward-spiraling commercial real estate market could cause a damaging ripple effect in the banking sector and in the overall economy.

“Small banks hold so many commercial real estate loans that they account for an insane 37% of their deposit base. $1.9 Trillion CRE Loans / $5.2 trillion Deposits,” Gerli stated on his Twitter thread. “No other loan type comes even close.”

For individuals who deposited cash with a small, regional bank over the last several years, the downside is that the money has already been loaned out – much of it to commercial real estate enterprises.

“It’s likely to owners of office buildings, apartments, and retail centers, who are now beginning to default on those loans,” Gerli said. “With values plummeting (that’s) not good.”

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