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The commercial real estate collapse is worsening! Recent reports are alerting that investors could face a bloodbath of loan defaults in the range of hundreds of billions of dollars. Even the Fed has sounded the alarm saying potential business bankruptcies could lead to sharp declines in commercial property values due to high insolvency rates. Ever since the government-mandated shutdowns were put into place last year, numerous big cities were transformed into ghost towns, with lots of skyscrapers going dark, shopping centers almost completely empty, and countless closed restaurants ravaging America’s economic landscape.
The $16 trillion sector was impacted in ways not seen since the Great Recession of 2008. And now, one year later, after several waves of business bankruptcies, many shopping mall owners remain unable to pay off their loans, which could trigger a crisis that would end up in the foreclosure of such properties, affecting banks, pension funds, investors, and bondholders that have invested in mall Commercial Mortgage-Backed Securities, and resulting in major losses.
Moreover, dormant offices and deserted commercial buildings are also a fiscal time bomb for municipal budgets that are highly reliant on property taxes and have been registering real estate revenue losses of as much as 10 percent in 2021. That is to say, it seems evident that a major financial disaster is approaching, and the commercial real estate collapse will be the trigger to an unprecedented domino effect that will cause long-term damages to both the economy and markets in the months ahead. That’s what we’re going to analyze in this video.
The commercial real estate collapse has two main losers: retail and office space. After the introduction of restrictions in foot traffic and social distancing regulations, the widespread closure of brick-and-mortar stores, and the shift to remote work have caused the value of retail and office properties to plummet, plunging development projects underwater, which means the values of the properties are lower than the amount the owners owe.
On one hand, the retail apocalypse is putting malls at risk of major loan defaults, which could pose a serious problem for the financial sector. And on the other hand, empty office space is weighting upon city budgets that rely on property tax raises to fund public services, which could lead to another round of mass lay-offs as cities need to cut on expenses.
The International Council of Shopping Centers recently warned that, if mall tenants can’t pay rent, the consequent domino effect could cause long-term distress to financial markets. And if shopping mall owners are unable to meet their loans payments, that could result in a flood of mall foreclosures, which will affect investors, bondholders, banks and pension funds have invested in mall Commercial Mortgage-Backed Securities
That’s why industry experts say that mass loan defaults will cause a bloodbath on investors’ earnings in the range of hundreds of billions of dollars. The losses are expected to hit bondholders like banks and pension funds and quickly mount. Then, the liquidity, or ability to sell assets, in the commercial real estate debt market could freeze up. In that way, the commercial real estate collapse can put malls at risk of extinction while also provoking a catastrophic financial crisis.
Moreover, a sharp decline in the value of commercial properties, especially emptied office buildings, is expected to critically compromise city budgets. Although for states, property taxes total less than 1 percent of tax revenue, for cities and towns they can account for up to 30 percent or more of the taxes used to fund local schools, and other public services. In January, Mayor Bill de Blasio of New York alerted that property tax revenues were expected to drop by $2.5 billion this year as the value of hotel, retail, and office properties has already declined by 15.8 percent. The city revealed plans of mass lay-offs to occur by the end of the year and the same is likely to happen across several other cities.
All in all, the commercial real estate collapse is putting both the financial markets and the economy under some serious strains. There’s just too much debt to service, and although property managers can try to defer some rents, finance some extensions, and dress up balance sheets, if the overall aspect of the economy doesn’t show improvements soon enough, these properties will be bound to face foreclosure and a substantial value losses.
Meanwhile, the economic growth of major urban centers of the country may be impaired for decades as such areas have recorded the highest rates of business bankruptcies and store closings. Evidently, all of those determinants can contribute to push us further into the recession. At this point, everywhere we look there are still many warning signs reminding us another devastating crisis can burst at any moment.
Epic website: https://www.epiceconomist.com
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