We're Going To Need A Bigger Bank: Debt And Bank Defaults Threaten Commercial Real Estate Like Never Before

There’s doom and then there’s gloom. Whatever you want to label it, a growing number of economic advisers and investors are seriously worried about the possibility of commercial real estate (CRE) crashing this year. 

The Kobeissi Letter, delivered to subscribers every Sunday with analysis on everything from crude oil and gold to treasuries and currency, added fuel to the impending U.S. CRE fire this week when it stated that more than $2.4 trillion of debt in the sector would mature over the next five years, more than any five-year period in history. 

The Letter pointed to the fact that it took the U.S. 224 years to hit $10 trillion in debt and in the last two decades alone, has added another $21 trillion. On top of that, it predicted that U.S. debt is expected to hit $51 trillion by 2033, adding another $20 trillion in 10 years.

The prediction was so dire that Tesla Inc. CEO Elon Musk responded on his Twitter account that CRE debt alone is “by far the most serious looming issue."

Meanwhile, Morgan Stanley's chief investment officer has predicted that the CRE sector is facing an economic crash worse than the 2008 financial crisis. 

"Morgan Stanley & Co. analysts forecast a peak-to-trough CRE price decline of as much as 40%, worse than in the Great Financial Crisis," Lisa Shalett said in the company’s weekly Global Investment Committee note, adding that the projected crash could be worse than the 2008 financial crisis. 

Her comments were based on trends crushing the CRE market, including remote workers and high-interest rates, making it more challenging for inventors to refinance their upcoming debt balloons. 

"More than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points," she said. Shalett also focused on the risk of regional banks holding 80% of outstanding U.S. CRE debt.

Another expected catalyst is the belief the U.S. government will begin defaulting if the debt ceiling is not raised by July. A log jam on Capitol Hill between Republicans and Democrats on the issue makes that raise contentious and unlikely to happen soon. A U.S. government debt default would result in the loss of over 5 million jobs and an expected 5% or more decline in gross domestic product. 

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House Republicans have stiff-armed efforts to increase the debt ceiling without specific spending cuts, while the Biden administration has refused to negotiate those cuts. Treasury Secretary Janet Yellen implemented accounting maneuvers to keep the government running until an agreement is reached and for now, has delayed an immediate threat of a shutdown. 

But lawmakers on both sides of the aisle must reach a compromise agreement by summer, with economic pundits telling Benzinga that the crisis could hit as early as May when a compromise is needed to avoid defaulting on the nation’s debt.