I think that is because, as a trend, S&P500 companies built inflationary variables into their revenue pricing since last year. Given a slowing economy with decreasing access to debt and spending, prices will have to decrease to be made up in volume (except some inelastic goods, like petroleum, energy, or healthcare). Massive layoffs are underway to complement the future of lower revenues (e.g. Accenture recently announced they are laying off 2.5% or 19,000 employees).
The problem I see ahead is that as companies decrease in size, corporate footprint will decrease and unless they own the property, it will go back to the lease holder and given the difficulty to get enough renters, the leasing companies will allow the property to default. It’s a tactical strategy to let the property go instead of rehabbing for mixed use: each building is “owned” by a company that is unrelated to the overall owners. The real estate will then go to banks, crippling their balance sheets and force them to be property managers which they are historically awful at. Then bailout will be imminent.
…the Fed’s BTFP tool is very powerful. It basically backstops a fire-sale of Treasuries to meet deposit outflows - banks have a much better alternative now. Contrary to the standard Discount Window, banks can now post Treasuries and MBS without (!) taking haircuts.
didn’t read past the headline and opening
paragraph, but I saw another article today about CRE (commercial real estate) being in
trouble; mostly due to pandemic and work from
home impacting need for office space. Demand
drop leading to loss of occupants . And higher
borrowing costs following.
The biggest issue with commercial real estate is that every bank is loaded up on loans secured by commercial real estate. The bank’s are shrinking their loan portfolios that means these commercial real estate loans aren’t getting renewed.
The other part of the problem is with the appraisals. With interest rates being so high, the discount rate that appraisers use is also going through the roof. This means the appraisals won’t be nearly as high as they were.
This will have a cascading effect. I see the chances of going into a recession at 90% (actually 100% but I always hedge my bets).
There was a ~$200mm foreclosure this week on a portfolio of multifamily properties.
On the courthouse steps in Harris County.
I haven’t heard anything about it in the press.
Poster’s Twitter bio seems legit & he provides a bit more info about the foreclosure in a linked tweet.
If you haven’t heard yet, Arbor (Realty) foreclosed on $229.3M worth of multifamily real estate in Houston, TX. One of our LPs personally invested… in one of these deals and his entire investment is gone… Properties owned less than a year. (bold added)
This is part of a mandatory capital call email one of our investors received from another syndicator he invested with. Nothing like some floating rate debt and not calculating reassessment of property taxes when you JUST BOUGHT A PROPERTY!
The International Monetary Fund has warned that its five-year outlook for economic growth is the weakest it’s been in more than three decades, with geopolitical tensions and tighter monetary policy to blame.
Zerohedge:
And…
“Commercial Real Estate (CRE) has its worst quarter since GFC — Most of institutional grade properties written down — Office sector remains troubled — CRE not overbuilt but combine {refinancing difficulties with perhaps a recession ahead plus rich valuations} and we’ll likely have downward price adjustments.”
