The commercial real estate market is falling into crisis, and it's not alone. This isn't a new development, either.
There's been a problem brewing in here since the pandemic started.
The problem is not in the residential real estate market for now. My research shows this market is healthy and will continue to grow.
But it's commercial "big brother," not so much...
Here are some numbers:
- The commercial real estate market is estimated to be valued at $21 trillion dollars. To put that into perspective, the residential housing market is less than half of that figure.
- Commercial office space vacancies are rising towards 20%
- Commercial office sale prices are reported to have fallen as much as 43% in markets like Los Angeles and San Francisco.
I can go on and on, you know that. The market knows that. The real problem is that the market is not acting like it knows it right now.
As a matter of fact, you need to check out what my colleague Shah Gilani has to say about the commercial real estate space. He's literally got this sector nailed down.
I'm going to go another step deeper, with a look at the regional banks.
They're tied to the commercial real estate sector more than most think.
When many of us go to the local regional bank we're thinking about savings and checking accounts.
But those accounts don't pay the bills and make investors money. No, the lending side of the regional bank does all the hard work.
Regional banks are one of the largest lenders to small businesses in the United States. The regionals also provide massive amounts of lending power to the commercial real estate market.
Put that together with the numbers above, and you've got a potential powder keg for the regionals.
I liken the situation to what we saw in the 2007 - 2009 housing crisis.
Regional and large banks overextended their lending to the housing sector.
Lower interest rates and a rapidly expanding housing market fueled the mortgage loan industry.
We all know how that ended. Housing prices collapsed and the banks suffered.
Unfortunately, a similar situation is brewing with commercial real estate.
Like the housing market in 2008, the commercial real estate market is seeing massive declines.
Post-pandemic trends have fewer people working in giant office buildings. There's been a small kick to return to work in recent months, but let's face it: Things will never get back to prepandemic norms.
At the end of 2019, there were 6.9 million square feet of vacant office space in the U.S. Just a year later, that nearly doubled - to 1.1 billion square feet.
27% of U.S. employees now work remotely as of 2023.
Additionally, 16% of companies are fully remote.
These numbers will likely increase, as 59% of workers report being more likely to choose an employer that allows remote work rather than one that doesn't.
Buildings that were built during a pre-pandemic economy that was exploding.
Buildings that are on the regional banks' balance sheets in the form of huge loans - most of which were made during a time with historically low-interest rates
these banks were happy to fuel the boom. Unemployment was low, offices were full... why not?
Now the regional banks are left holding the bag - meanwhile, according to the New York Post, the Risk of default in the commercial real estate market is growing in part to the facts listed above rendering these huge physical office locations to be nothing more than a money pit.
the real kicker here falls on day one of Economics 101 - supply and demand...
with these properties becoming liabilities rather than an asset their value is quickly going to decline.
Analysts at Morgan Stanley are saying these locations' value could drop by nearly 40% while nearly $1.5 trillion in debt on these properties comes due in the next two years.
I'm going to be honest here, there's a number of companies that I'm willing to say could be in ALOT of trouble as these companies lock their doors for the last time and begin opting for remote work culture rather than the water cooler culture.
But, as a technical trader and forever a student of history we are going to dig a bit deeper and see how we can trade this the smart way...
In order to do that we need to go back to the last time the spotlight got put on the regional banks - the collapse of Silicon Valley Bank (SVB), on Friday, March 10, 2023, was the official date but there were warning signs as early as the Monday prior...
of course, you saw SVB drop that's a given - but the fallout across the entire sector - in this case, the SPDR S&P Regional Banking ETF (KRE) is where we are going to pull a lesson from:
You'll notice the precipitous drop in KRE, which I've highlighted above.
one thing that may be flying under the radar is the realization that this drop DOSEN'T coincide with the collapse of SVB, but rather just the rumor that something bad is going to happen to a single part of the sector...
so if you want to capture some profits from the danger lurking in the commercial real estate market the KRE is going to be where you'll want to park your cash.
Not only is this sector still shaky, given it just broke below its 50-day moving average (MA50) and teetering on a round number - $40 - if this doesn't hold you'll immediately see KRE retest its recent lows of $35 - an easy 12% drop in the stock.
This being an ETF position, it removes the headline risk of a single bank pleasing the market with a shiny object headline but it also gives us exposure across the board - allowing us to rest easy and avoid wondering if we picked the right stock.
If I were placing a trade here - I'd look at the Jan 19, 2024 expiration put - t take a look at a strike that is just out of, or at the money.
Remember, we have earning season coming up so this ETF could tread water for the next five weeks or make a MASSIVE 20% swing so the extra time will absolutely be worth it in terms of protection.
I'll keep you up to date on this sector because it's at the top of my hitlist and this is a trade that I don't want you to miss out on.
Until tomorrow,
The post Commercial Real Estate Market is Heading Toward a Critical Mass Moment appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.