Commercial Real Estate Collapse Plunges Property Value By 75% As Debt Wave Trigger Mass Foreclosures

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The commercial real estate collapse is rapidly accelerating, and economists are warning that the sector is about to suffer a double-whammy with the reopening of the economy. After almost one year of experiencing extensive losses – with hundreds of thousands of tenants who went bankrupt due to government-mandated shutdowns being ruthlessly pushed out of the market, property owners and lenders haven’t felt the full force of the impacts of mounting rental delinquencies and a dramatic surge of vacant spaces. The worst is yet to come, they say, as the increase in people working from home is resulting in a major decline in demand for office space, while hiked online purchases are triggering more store closures of brick-and-mortar retailers at shopping centers. As both segments continue to struggle, occupancy rates may never return to previous levels, which in turn, is causing property owners to lose their ability to meet their loan payments, and lenders are at the brink of facing a tidal wave of bad debt amid new working trends and a changing economic landscape.
One of the most likely causes of this drastic downfall is the financial distortion caused by the Fed’s response to the current recession. Before the health crisis started, corporate debt was already skyrocketing, and that was driven by loose monetary policies designed to drive borrowing. However, as several businesses unexpectedly went under, leaving the market without paying what they owed to their landlords, the commercial real estate market was buried in debt, and consequently, property values are falling like a rock while a significant rise in foreclosures is already being registered. Much more distress is ahead, and that’s what we’re going to expose in this video.
The rationalization of floorspace might be fatal for shopping malls. Dan McNamara, a principal at hedge fund MP Securitized Credit Partners said that mall liquidations are expected to continue as 31 of the 39 malls in CMBX 6 are currently impaired. According to recent reports, malls are registering value losses of up to 75%.
On top of that, the fact that Unibail-Rodamco-Westfield, the owner of twenty-seven malls across the country is in desperate need of selling anything it can to lessen the burden of its $32 billion debt load won’t help mall valuations at all. Consequently, as the commercial real estate market gets plagued by too much debt and not enough profitable assets, banks are worrying that soon the financial system may get overloaded with a tidal wave of distressed loans.
As for the collapse of the office market, while a tech exodus is happening in San Francisco, after Oracle left the Bay area and headed to Austin, Texas, the total vacant office space in the region, including sublease and direct lease, is now of 13.9 million square feet, a new record, exceeding the levels seen during the dot-com bust and the financial crisis. Roughly 20% of corporate executives, or one-in-five said they plan to reduce office space in 2021, according to the American Institute of CPAs survey.
In New York, the financial district is already registering an enormous glut of office space. In Times Square alone, there’s $1.1 billion worth of property loans now considered distressed, according to CREDiQ. Moreover, Federal Reserve data showed that, in the third quarter of 2020, U.S. commercial property debt jumped to an all-time high of $3.06 trillion, and as it seems that borrowers will leave this debt to the lenders, the commercial real estate collapse is threatening to trigger a banking crisis and result in the loss of billions of dollars.
Additionally, according to a new report from ATTOM Data Solutions, foreclosures of commercial properties jumped 16% between January and February, and in 29 states, they’re still trending upward. Some say the commercial real estate collapse is a silent crisis no one seems to be paying attention to. Needless to say, that’s a particularly dangerous situation because the entire market is reliant on banks, and the occurrence of a banking crisis on top of the looming simultaneous crash of the stock, housing and bond markets will undoubtedly push the United States over the edge. As our businesses continue to die with each passing day, and both our financial markets and our economy have fallen into a ruinous debt spiral, and we should all be watching very closely to the next developments of this catastrophic downturn, here, on Epic Economist.

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