Commercial real estate seems to have been negatively impacted by three things over the last 10 or so years, one being the online retail effect.
Large online retailers have started to replace many “ma and pa” operations. Because of this, those operations no longer need to rent real estate. The second factor was remote work due to COVID-19. Employers sent employees home for work and then determined that they could be just as effective, and perhaps even more profitable, by having employees work from home instead of returning to the office.
As a result, some employers didn’t renew leases and some even outright sold their properties. Even large cities like San Francisco are reporting around 30% office vacancies. The last factor is rising interest rates in 2022. Rising interest rates further intensified employers not renewing leases and created a significant decrease in new building purchases.
In contrast to 2008, when the banking crisis was focused directly on big banks, this potential crisis is focusing on small to mid-sized banks. Small banks are more susceptible to these problems because they have simpler business models than large conglomerate banks, making the dependance on commercial real estate more magnified.
According to Federal Reserve data, small and regional U.S. banks collectively hold around 67% of commercial real estate loans. This eye-catching figure is not only relevant to office space, but it also includes apartment complexes, retail space, construction loans, loans backing farmland and more. Morgan Stanley estimates that about $1.5 trillion in commercial real estate debt will mature over the next two years.
My message here is not one of getting your money out of your small local bank. I do not know the specific finances of any of our local banks, so this message is intended more broadly. Rather, this is a message of making sure your overall investment strategy includes protection and conservative options.
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Jason LaBarge, financial advisor and president of LaBarge Financial
7 Riggs Avenue, Severna Park, MD 21146 443-647-4321
Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker dealer and a registered investment adviser. Cetera is under separate owner named entity.
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