The commercial real estate bubble is about to burst!
Perfect storm
Yesterday, Warren Buffet and Charlie Munger did some interesting but not surprising talks about commercial real estate and the consequences for the banks and the American economy. This during the stock holders meeting of Berkshire Hathaway.
Charlie Munger said that commercial real estate is largely overvalued these days, and foreclosures are going to put smaller banks into trouble. Because they have trillions of dollars in "bad loans" outstanding that funded that real estate. But a perfect storm hit the commercial real estate market the last few years.
- Covid made commercial real estate less important for businesses, as more and more people got to work remotely from home, and they keep on doing it. Which has made the demand for office space plummet the last three years.
- Low interest rates in the last 15 years have made lending very easy for just about everyone. This made investing in commercial real estate temporarily a lot more interesting than it was.
- The recent rate hikes have decimated the return for commercial real estate owners during the last years. Which makes a lot of those investments become uninteresting, and down right working at a loss.
- The last three points together makes the supply of commercial real estate on the market rise very fastly, which makes prices go down. Lower than what sometimes was loaned out for them. So, banks have bad loans on their balance sheet.
There's going to be pain, who will bear it?
This was another quote by Charlie Munger. There will be blood and pain in this market. The big question mark is, who will bear the pain. And who will bleed the most. Chances are very big that some smaller banks will go under, because of the large amount of bad loans on their balance sheet. So, once again, a real estate bubble will be responsible for a financial crisis!
The lesson from this is, don't ever loan more than your wages can bear. Be prepared for worse days in the market. And always try to diversify your portfolio!
Sincerely,
Pele23
Posted Using LeoFinance Alpha
These banks primary interest is to get profit in whatever way they can, which has resulted to them loaning out large amount over time.
Concerning the commercial real estate, things has being quite crazy lately with the imbalance of world economy. Ideally thinking, the world has moved on from the COVID issue, but hasn't recovered much. The commercial real estate business happened to be one of so many businesses that got hit by the pandemic.
I think this hit was hard due to the physicality of the business and less digitization.
Thanks for sharing this post @pele23.
For three years they have said that the real estate bubble to be burst in my country. I think, except remote working, immigrants have caused the demand to surplass supply.
Right after Corona this way we are now seeing that people don't have money to buy things which is why we are seeing a certain decline especially in property prices especially here in Pakistan. As soon as people have money inside, their prices will go up again.
Let it burn, its crony capitalism anyway.
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