We could be looking at the most extensive banking crisis since the meltdown in 2008. With U.S. banks SVB and Signature collapsing, Republic Bank teetering and Switzerland's Credit Suisse surviving after a government rescue, the last few weeks have been daunting. And while most were caught off guard by the sudden struggle for banks to operate amid rising interest rates, one man stood virtually alone near the end of 2022 in sounding a definitive warning. And he’s not done yet.
On Nov. 18, Benzinga reported on comments made by Ben Miller, who oversees the real estate investment platform Fundrise, during the company’s “Onward podcast.” Miller outwardly worried that the U.S. economy was headed for a potentially catastrophic bank liquidity crisis, saying they could not continue making real estate loans and still cover rapidly rising interest rates. Among his observations:
- About $5 trillion of asset-backed lending existed outside of banks with much more debt and much less liquidity than there used to be. Corporate borrowers had 300% more debt than before the 2008 financial crisis.
- Any companies with a real estate loan due in the next few years have “a lot more debt in the system than people realized.”
- Many unregulated nonbank lenders, mortgage real estate investment trusts, private equity funds, commercial mortgage-backed securities, residential mortgage-backed securities and collateralized loan obligations are involved in making loans banks can’t cover.
- Small businesses will have a problem with all types of loans, including consumer, auto, corporate and real estate. The biggest borrower of them all is the hidden borrower, which is actually the lender.
Miller’s warnings, he told his audience, came after he met with some of the biggest banks in the world during a series of Wall Street meetings. “They told me they don’t have any liquidity” because of rising interest rates, Miller said at the time. “This is going to play out. The question is, how bad will it be?”
Well, the answer to that question is one most won’t want to hear. In revisiting his predictions, Miller told Benzinga this week that the U.S. economy will get “much worse” before it gets any better. He also doesn’t understand why people seem so casual about it, especially after just going through economic peril at the beginning of the pandemic when everything shut down. “Literally, people have been saying to me, is this time going to be different, and I’m like, why would it be?”
When asked, “what’s next to fall?” Miller gave what can only be perceived as a scorched Earth response. “I almost think that’s beside the point because every part of the economy got over-leveraged. Everybody is being impacted. Who is next or second, or third weakest in this economy is irrelevant. It’s like climate change. Certain parts of the world will be more impacted, but everyone is impacted. It’s one system and everyone is part of that system.”
Last year, Miller accurately predicted the downfall of retail and office properties, saying they “will hit a wall,” adding, “what’s going to happen, I believe, is that office and retail will become unfinanceable, and when a loan comes due, there will be no money for it. Working from home made a lot of office space obsolete.”
Not only has he not backed down on that belief, but he’s doubled down on what he said last fall. “Lowering interest rates are not going to save us. Fifty percent of the offices in America will go into foreclosure this decade. It’s like malls ten years ago. They were in the same place.”
As for those looking to weather the storm in CRE, he said, “There’s only two options for investors. Do nothing or take advantage of deals. If you own a high-quality real estate asset, you’re going to benefit from that. If you can buy in this depressed market, then you can pick up great assets before everyone realizes there's a new recessionary cycle beginning. It’s going to be ugly and scary, and it's going to take some courage.”
But he added the U.S. economy, on the whole, is headed for a very bumpy ride sooner than later. “The end of high-interest rates is nigh. It’s imminent, and it will be followed by a Federal debt crisis that I think is going to hit on May 4.” Miller believes with a split congress, another government shutdown is inevitable when “the markets will tank” and begin the next cycle of interest rates declining. “We’re headed for drama, and that drama is going to cause market turbulence in an already fragile environment. I may be one of the only people saying this, which is bizarre to me. It’s almost boring to talk about this, but it seems so obvious.”
For the immediate impact, Miller predicts that CRE investors have a short window to take advantage of the market. “The financial economy bottoms in the summer and the real economy lags by six months. Typically you want to buy at the bottom, which will be this summer.”
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