By Nick Massey
July 4, 2023

Is commercial real estate the next sector to drop?

Is commercial real estate facing a crisis? Concerns rise as regional banks and interest rate hikes threaten the sector.

To be a good long-term investor, you need a certain degree of optimism. Optimism is good, but sometimes you need a little near-term pessimism, or you can end up waiting a long time.

When there is a crisis of some kind, I can certainly understand why so many people are eager to call a crisis “over” or even “resolved” as quickly as possible. Thinking that the worst is behind us makes people feel better.

I consider myself a “cautious optimist.” As an investment strategist by trade, I have to be cautious. I’ve learned over the 46 years I’ve been doing this that the “next shoe to drop” can take a lot longer to resolve itself than most people think.

Think about the 2008 Great Financial Crisis. The collapse of Bear Stearns came to a head in March 2008, though its troubles had begun a full nine months earlier. The media (and Fed Chairman Ben Bernanke) were quick to call that situation “contained.” But then, six months later, Lehman Brothers collapsed and triggered the wave of bank failures that really defined that crisis.

Today, I think the same sort of thing is shaping up in the regional banking and commercial real estate sectors. I fear that commercial real estate may be on shaky ground.

As I’m sure you know, the current regional banking crisis began in March 2023 with the high-profile failures of Silicon Valley Bank, Signature Bank, and First Republic Bank. They brought with them a flurry of headlines, all of which have since passed, and the media has now moved on to other stories, such as artificial intelligence.

Personally, I don’t believe we’ve seen the end of the regional banking crisis. And that economic event is intimately intertwined with another brewing fall in commercial real estate, which has gone relatively underreported.

Ironically or not, the same trigger that exposed big problems in regional banks is also threatening commercial real estate investments across the U.S. It’s being triggered by the fastest and most-aggressive interest rate-hike cycle in modern history. The Federal Reserve’s 500-basis-point hike in interest rates trashed the value of Silicon Valley’s “safe” assets (long-dated U.S. Treasury bonds), and it’s having the same effect on commercial real estate prices, from San Francisco to New York and practically everywhere in between.

A few of the highest-profile properties and operators have started making the news: Blackstone recently sold two office towers it acquired in 2014 for 36% less than it paid for them. Brookfield, one of the largest real estate companies in the world, recently defaulted on more than $160 million worth of commercial real estate debt. Japanese investors in a San Francisco office building once worth $300 million are looking to unload it for just $60 million. That’s an 80% hit! (Ironically, I used to work in that building in the 1980s. I would have laughed then if you had told me that might happen.)

It’s not just office buildings that are feeling the pain. Retail is pulling back in a big way as well: Foot Locker plans to close more than 400 stores. And CVS Pharmacy will close 900 locations over the next few years. Those are just a few examples of stories you likely haven’t even heard about since they didn’t make the big headlines as Silicon Bank stories did in March and like Artificial Intelligence stories are doing today.

What’s more, I believe these are only the early cracks, which will eventually give way to a larger and more widespread panic. Frankly, I don’t see how it can’t happen…

Commercial real estate vacancies at now at a 20-year high. There are many large commercial property owners in major cities that just won’t need all that space anytime soon. The amount of “distressed” commercial real estate debt — loans currently in default or close to it — is also at a 14-year high! And we’re starring down a wave of potential defaults…

A full $1.5 trillion of the $1.9 trillion commercial real estate debt market — $4 out of every $5 on loan — is set to mature over the next 36 months and will need to be refinanced. The bulk of those loans were originated when interest rates were near zero. Now that rates are at least 5% higher (depending on the quality of the borrower), the numbers just don’t add up anymore.

Think of it this way. What happens when a commercial real estate investor like I just described above defaults on their loans? Or the bank is undercapitalized because of too many non-performing loans, and they tell the borrower that they just aren’t doing those kinds of loans anymore and they won’t refinance. What does the borrower do then? Go somewhere else where they don’t want to do the loan either, or the rate would be so high the borrower can’t pay? See where this is going? The snowball effect of this could be felt for years.

As I said, regional banks are intimately tied to the commercial real estate market. That’s because they’ve originated twice as many loans on commercial properties as the “big” banks, like J.P. Morgan or Bank of America, have. The big banks have the same problems, but their business models have them diversified into many different areas, and they can probably weather the storm. Even then, do you really want to ride that train when there are other opportunities?

The bottom line is this. I would suggest avoiding stocks with a large exposure to commercial real estate for the next several years. This problem is not going away anytime soon. If you are still holding stock positions in any regional banks, you might want to take a close look at those and what their commercial real estate exposure is. In my opinion, the problems there are just starting. Thanks for reading.

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About Nick Massey

Nick Massey is a retired financial advisor and CFP, and former President of Massey Financial Services. He can be reached at