The CRE market in office and retail space is in serious trouble and I have been saying it for months before we banks get into trouble. Yet we want to continue believing that the banks are resilient.
The market consists of $4.5 trillion income-producing properties and $470 billion of construction loans. Banks hold less than 40% of income-producing loans and around 45% of all CRE mortgages. Small banks are vulnerable but they aren’t the only ones. The small and regional banks hold about 27% of CRE loans and the largest banks hold 14%. Non-bank lenders aka private equity hold nearly 55% of loans. That’s a lot of exposure for non-regulated non-depository institutions that neither the Fed nor the government can or have the political stomach to bail out.
Facing record vacancy rates and empty downtowns across the nation is an issue that just won’t get resolved anytime soon. A recent study from the University of Toronto has shown that cell tower usage in downtown Indianapolis is down 45% versus pre-pandemic despite the end of covid emergency. Some cities are facing 20%+ office vacancies. That is unheard of for the industry. Valuations of office buildings in downtown areas are falling and the few deals being made (volume is down 85%) are selling in some cases at fractions of 2019.
The Monroe Street Tower in Chicago recently went up for sale. It was originally bought for $122 million in 2014 then was refinanced with an $87.7 million loan from Morgan Stanley in 2019. Some sources close to the deal are saying it is probably worth less than 85 million. And this is the story across the country. Properties bought at excessive prices between 2014 and 2019 that were leveraged to the nose with multiple loans sitting a quarter or more empty with their loans coming to maturity and cannot be refinanced at much higher rates and having to take out cap rate insurance that has ballooned.
REITs, private equity, and banks are facing an office apocalypse. Retail is not far behind and next year we will see the same from the multi-family housing market as rents continue to fall, vacancies rise, and 50 year high in multi-family construction starts inundating the market. All this as credit continues to tighten, rates remain high, and the economy worsens having to deal with people not working in offices because they are either working from home or unemployed.