Dear Reader,
I used to love walking through the big city streets. New York City, Chicago, Washington D.C....
The endless stream of commerce buzzing down those avenues. Businesspeople - carrying suitcases instead of cellphones. Busy shops. Busier restaurants. Gigantic skyscrapers.
I dreamed about what it might be like to own those big skyscrapers.
People pay you to store all their desks, tables, and more in those offices. If their business failed, another tenant lined up to fill the space. They pay more in rent, you get tax breaks and depreciation.
Today, though, you couldn't pay me to rent an office... or buy a building.
Things are breaking bad in the real estate business.
CBRE reported downtown office vacancy rates hit 17.6% during the fourth quarter of 2022. That's up from 13.8% in 2021. Plenty of community advocates want to turn big office buildings into apartments...
But who wants to make that investment right now?
How Bad Will This Get? Here's How Bad...
Morgan Stanley set a rather dire forecast for central business district and suburban office real estate. Retail doesn't look too good, either.
Based on the chart above, we're set to see a worse downturn in big city office real estate than what we witnessed during the 2008 - 2009 Financial Crisis.
This situation is so ugly that some analysts anticipate that the Fed will capitulate and pivot to prevent widespread defaults on properties. Goldman Sachs is calling for a steep correction across all real estate.
But take a step back from these predictions. Wouldn't Goldman love lower real estate prices? You know, so they can buy it?
Because there is something to that. There are safe, valuable segments for investors to explore - places where real value is hiding, and I want us to get at it before Goldman Sachs does. And today, I will talk about those over at Midday Momentum.
Here's What I'm Watching Today (April 20, 2023)
Economic Incompetence: On May 1, Fannie Mae and Freddie Mac will start adding new charges to loans for people with higher credit scores and capital for a down payment. Why? Well, fairness, of course. Under the new rules, a person with a FICO score over 740 who puts down 15% to 20% on their home will pay a 1% surcharge. That's a 300% increase from the previous fee. This idea is so out of left field and economically illiterate that only a Washington bureaucrat could devise it. If you spent your life working on building your credit like a responsible person and you're prepared to buy a new home, well, congratulations, sucker! Your interest rates are going up in the name of "equity." Prepare to pay more for the same product and service in the future... just because you had the audacity to manage your money responsibly.
Oil Slides: After OPEC slashed oil output, Goldman Sachs predicted that oil prices would go to $95. I warned that oil prices were headed lower. And here we are, back under $80 per barrel. What did I say? Don't trust Goldman and understand the recessionary fears. The narrative shifted Wednesday on concerns that a pending interest rate hike by the Fed would taper demand for crude later this year. Investors are also worried about a resurgence of European inflation and lackluster economic data from China. Now is the time to look for further weaknesses in crude. A pullback to the $75 level will make an attractive entry price for many top-tier energy stocks.
Politicking: It's President Joe Biden against House Speaker Kevin McCarthy on the debt ceiling. As the actual future of the dollar hangs in the balance, Biden started calling McCarthy names and claiming the GOP would default on the debt. As I explained in Midday Momentum yesterday, no one in Washington knows what they are doing. And the explosion of the federal debt to $50 trillion - as projected by the Congressional Budget Office - is catastrophic to your money. Buy some gold, own oil stocks, and get out of zombie stocks. Your future is at stake.
The Chart of the Day: Time to Be Contrarian?
Are we being too bearish to not recognize that the bottom may have come in October 2022? According To Bank of America, investor allocation of stocks to bonds has now dropped to the lowest point since the Great Financial Crisis.
Now, how should we look for the bottom in the market? Well, stay tuned - wait 'till you see the chart for tomorrow.
Stay Liquid,
Garrett
The post Morning Update: Commercial Real Estate Is in Meltdown - Here's What to Do appeared first on Midday Momentum.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.