2008 All Over Again? Commercial Real Estate Bubble About To Burst

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00:00 Picture this, over 1 trillion in commercial real estate debt is coming due in 2025.

00:08 Its vacancy rate reached 17.8% at the end of September.

00:13 And that's not all.

00:15 You've seen Mark Baum or Steve Eisemann as portrayed by Steve Carrow in the big short.

00:22 Now look what he's saying now.

00:24 I mean, do I think commercial real estate, well not commercial real estate, office real

00:30 estate is going to be a problem?

00:32 Yeah, we do.

00:33 I happen to think the whole banking sector is uninvestable.

00:36 Even Kevin O'Leary.

00:37 I'm just being honest with you that nobody's going to put money into a regional bank when

00:41 they know it could be one of the ones that goes to zero next week.

00:45 So why would you do that?

00:47 Commercial real estate and regional banks are a ticking time bomb that could be about

00:52 to explode.

00:53 Could this be 2008 all over again or even worse?

00:58 Demand for everything, retail, office, apartments, every aspect of real estate is going to get

01:03 whacked and I think we're just in the first inning.

01:05 Welcome back everybody to Benzinga where we level the playing field for all investors.

01:12 Today I will reveal what I feel is the next ticking time bomb in the financial world.

01:18 The regional bank exposure to the faltering commercial real estate market.

01:23 So let's paint the picture of how this started.

01:26 The seeds of the commercial real estate lending boom were planted back in 2008 when the housing

01:33 bubble burst.

01:34 I'm sure you've all seen the big short.

01:38 Predatory subprime mortgages, feverish speculation, and rampant fraud in mortgage-backed securities

01:46 ultimately triggered a massive foreclosure crisis.

01:51 Home prices plummeted, major banks failed, and the stock market plunged, wiping out nearly

01:58 $8 trillion in wealth.

02:01 It was the worst financial crisis since the Great Depression.

02:07 Things are normal.

02:08 Nothing's going on.

02:09 We don't see any problem.

02:10 And I turned to him and I said, "You will."

02:13 In response, the Federal Reserve took drastic action to save the banking system and the

02:19 economy.

02:20 They slashed interest rates to zero and unleashed a tidal wave of cheap money through quantitative

02:27 easing.

02:29 While necessary at the time, this flood of easy money had unintended consequences.

02:35 With mortgage lending now tightly regulated, banks and investors turned to commercial real

02:41 estate in search of higher yields.

02:44 So to lend to a bank, we simply use the computer to mark up the size of the account that they

02:49 have with the Fed.

02:50 So it's much more akin, although not exactly the same, but it's much more akin to printing

02:54 money than it is to borrowing.

02:57 And with interest rates so low, debt was cheaper than ever.

03:01 Lending for commercial properties like office towers, malls, apartments, and buildings absolutely

03:06 exploded.

03:07 Federal commercial real estate loans at banks more than doubled $1 trillion in 2015 to over

03:14 $2 trillion by 2022.

03:18 It was a speculative friendly not seen since the lead up to 2008.

03:23 And that brings us into today.

03:25 Fast forward to 2023.

03:28 Silicon Valley imploded almost overnight in a modern day bank run.

03:34 Their loans were too concentrated in risk startup investments.

03:39 When a few high profile startups failed, it sparked contagion.

03:45 Depositors rushed to pool their money on fears that SVB would collapse next.

03:50 The Federal Deposit Insurance Corporation rushed in to contain the damage, orchestrating

03:56 a takeover to avoid outright failure.

04:00 But immense damage was already done.

04:03 The bank's headquarters now sits empty in a ghost town of deserted cubicles and blank

04:11 screens.

04:12 SVB's demise also claimed Signature Bank and cast a pall on investments like Credit

04:18 Suisse.

04:19 Nervous customers fled banks with any type of risk.

04:23 What did this reveal to the concerned investors and bank customers?

04:28 This crisis revealed the glaring dangers of overexposure and the lack of diversification.

04:34 Yet many regional banks are making the same mistakes today with commercial real estate

04:40 concentration.

04:42 This all leads to the massive systemic problem in lending, which is already showing cracks.

04:49 In fact, around 15% of the US bank now exceeds the FDIC's recommendation concentration

04:56 levels for commercial real estate loans.

04:59 This almost doubles what it was two years ago.

05:02 The SVB implosion provided a warning.

05:06 Regional banks are skirting on the edge of their own abyss.

05:09 Did you know an estimated $1.5 trillion in commercial real estate debt is set to mature

05:16 by the end of 2025?

05:19 With rising interest rates, many property owners are finding it increasingly challenging

05:24 to refinance their existing loans.

05:27 So I'm sure you've had to refinance at some point.

05:31 Now picture this, instead of refinancing your $300,000 mortgage, you had to refinance billions

05:37 of dollars.

05:38 This is exactly what the bank and loan originators are facing today.

05:43 But here's the catch, the market's particularly shaky in the office sector.

05:48 With remote work becoming a norm, there's far less demand for office space today.

05:54 In some major city, vacancy rates are soaring causing office property values to plummet

05:59 by a staggering 27%.

06:03 Why does that matter and how could you get profit off this?

06:06 Let's go deeper into the numbers and answer the top two questions.

06:11 What type of bank has the most exposure and which banks have the most exposure?

06:18 With some eye-opening stats, regional banks have a whopping 55.5% of all outstanding commercial

06:26 real estate debt.

06:28 This is significantly higher than what is larger national banks have on their books.

06:34 When we talk about the overall exposure of commercial real estate lending, that of course

06:39 would include Wells Fargo around $154 billion, followed by the Bank of America at $75 billion.

06:47 Now what really matters is the size of exposure relative to banks balance sheet as the impact

06:53 of prolonged interest rates are hitting banks hard and property values are starting to decline.

06:59 Many loans will be underwater.

07:01 Get your pencils out now, this is where Money Mitch gives you the trading idea from the

07:07 video.

07:09 Of all the regional banks overloaded with risky commercial real estate debt, a few names

07:14 stand out especially vulnerable making them potentially short targets.

07:21 Let's focus on M&T Bank, MTB.

07:25 Based in Buffalo, M&T has an alarming $44.6 billion in total commercial real estate loans

07:33 equal to a massive 34% of their total lending portfolio.

07:39 Imagine if over one-third of your personal finances were tied up in your friend's struggling

07:44 restaurant or your brother's vacant office building.

07:49 This situation in MTB is exactly what they're facing.

07:53 It's not just M&T, Bank of Ozark and I'm not talking the one on Netflix, down in Little

08:00 Rock has gobbled up commercial real estate like it's an all-you-can-eat buffet at the

08:05 Bellagio.

08:06 These loans make up 61.4% of Ozark's total lending, leaving them hugely exposed to any

08:14 downturn.

08:16 As property values decline, these two regional banks are primed for significant losses.

08:22 Their extreme exposure relative to assets should put MTB and Ozark on every short seller's

08:29 radar.

08:30 MTB and Ozark are the dominoes posed to fall first, triggering a cascade of bank failures

08:37 across the region.

08:38 In summary, MTB and Ozark stand out as overexposed and vulnerable to the coming commercial real

08:45 estate slide.

08:47 Their lending behaviors may make them the next big shorts.

08:52 Before we continue, be sure to subscribe and like this video to stay up to date with the

08:58 latest insights and if you want to see more deep dives on topics in Wall Street you can

09:03 always add me @MoneyMitchBZ on Twitter.

09:07 But wait, there's more to this story.

09:09 If capital levels of these banks fall too low, some of them could become what we call

09:15 zombie banks.

09:17 Simply put, they won't generate enough income to stay afloat.

09:21 This is the sign that the major collapse has begun, but by this time the FOMO hits and

09:27 it will be too late for traders to chase.

09:29 I'm sure you're wondering why you think things will get this bad and calling me a

09:33 doom-sayer, but do you remember that savings and loan crisis of the 80s?

09:40 I'm sure not many of you do, but zombie banks back then, these banks took too risky

09:45 bets to recover profits, making the crisis even worse.

09:50 We all know how greedy banks can be and why wouldn't they, as they get bailed out nearly

09:55 every time.

09:57 Which puts in question, what are the rising credit risk?

10:01 Let's look at this story of Julie, a small business owner in Atlanta with 5 retail closing

10:07 stores in local malls.

10:09 She took out a $3 million adjustable rate loan in 2019 to expand improving stores, counting

10:17 on continued strong foot traffic.

10:20 But the pandemic turned malls into ghost towns overnight.

10:24 Then interest rates kept climbing on her variable loan.

10:28 As the Fed raised rates, monthly payments went from $12,000 to $22,000, almost double.

10:34 Julie cut expenses to the bone trying to keep up with payments, but with sales down 40%,

10:40 she had to close 2 stores entirely and last week she made the painful decision of defaulting

10:46 on the loan before bleeding her business dry.

10:50 Scores like Julie are becoming more common and showing the cracks that are in the commercial

10:56 real estate space.

10:58 Take a look at this graph as delinquencies on commercial real estate loans continue to

11:03 rise.

11:04 The overall CMBS delinquency rate sits at 4.25% as of August 2023, up from just 1.55%

11:14 before the pandemic hit.

11:17 Real estate delinquencies are up even more sharply, raising over 150% to 6.16%.

11:25 The falls are on the rise and regional banks highly exposed to commercial real estate looks

11:31 poised to take significant losses in the months ahead.

11:36 As we move forward the concern is what happens on the underwriting standards for refinancing.

11:43 Commercial real estate loans from 2018 and earlier with 5-7 years of maturity are now

11:50 knocking on the door for renewal.

11:54 Regional banks face years of pressure in this sector and it's not just from the percentage

11:59 of loans maturing soon.

12:02 To wrap it all up, regional banks are on shaky grounds as the commercial real estate sector

12:08 enters the distress mode.

12:11 This crisis could unravel over the next months.

12:14 Let's not forget how Michael Burry made his billions.

12:18 Michael Burry was actually early on the financial crisis which led him to start the bet in the

12:23 red until the house of cards started to fall.

12:27 From there things snowballed really quickly.

12:30 The clock is ticking on this commercial real estate bomb so I'm going to position my portfolio

12:36 defensively and capitalize on the impending slide.

12:41 Now the question is, you gotta ask, will you capitalize on this opportunity?

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