This Will Be Our 2008 Collapse: Part 2

It’s going to get worse.

… much worse.

Two weeks ago, billionaire investor Jeff Greene warned that a wave of defaults could soon slam the commercial estate market…

And real estate investors will have nowhere to hide.

According to Green, commercial office space isn’t the only corner of the market staring down the barrel of a loaded gun. “Every aspect of real estate is going to get whacked.”

Everything from retail to the apartment segment is in trouble… and that’s not likely to change anytime soon.

According to Green, we’re still only in the “first inning” of this crisis.

Greene isn’t someone you can afford to ignore. He became a billionaire by buying credit default swaps during the last housing bubble. In other words, he saw the last major crisis long before most investors.

Of course, Greene’s warning shouldn’t surprise regular Discount readers.

On July 23, we explained how the commercial real estate (CRE) was barreling towards a major crisis.

If you missed that issue, here’s a quick recap…

In short, CRE is one massive powder keg.

Today, there’s 1 billion square feet of empty office space in the United States. If you stacked all that empty space in a single office tower, the building would stand 48,000 stories tall!

That’s a big problem.

This year, $175 billion in office debt is set to mature, while another $150 billion in debt will mature.

By the end of 2024, $1.4 trillion worth of commercial real estate debt needs to be refinanced.

One of the biggest issues facing CRE today is the rise of remote work.

Thanks to technological advances like video conferencing, employees no longer go into the office. They can work from home.

In the U.S., about one-quarter of all employees work from home.

Because of this, companies require far less office space than they used to.

That’s sent office vacancy levels to historic levels.

According to Green, the straw that could break the camel’s back is commercial real estate.

The U.S. Consumer is on their Last Legs

Last month, U.S. employers cut 75,000 jobs. That’s the most job cuts in three months. It’s also a 267% spike from the same month a year ago.

Large spikes in job cuts often occur just before a recession sets in.

We saw that play out in the early 2000s after the dot-com bubble popped… and again during the early stages of the 2008 global financial crisis.

The American consumer has also been burning through its savings at a rapid clip.

The chart below says it all. Here, we can see that median household savings levels have dropped considerably - across income levels - since 2021.

This is happening because there was a massive increase in spending during the pandemic.

Of course, the government is no longer mailing out “stimulus” checks to everyday Americans. To make ends meet, many people are dipping into their savings.

You don’t have to be an economist to see that this isn’t sustainable.

Unless this trend reverses soon, the economy could run into major problems… hhc create more issues for the increasingly distressed CRE market.

Commercial Real Estate is Starting to Crack

In April, Brookfield – one of America’s largest office space owners – defaulted on a $161 million loan.

Then in July, Starwood defaulted on a $213 million commercial loan for an office building in Atlanta… after the city’s vacancy rate hit 22%.

More recently, the Vella Group defaulted on a $79.1 million loan tied to four industrial and office properties in Los Angeles.

And that’s just one segment of the CRE market!

Another $22.7 billion worth of retail properties are also under distress, as well as $13.5 billion of hotels.

The “Smart Money” Sees the Writing on the Wall

Last month, Bloomberg reported that JPMorgan, Goldman Sachs, Capital One, and M&T Bank are among key huge firms looking to offload their CRE holdings.

JPMorgan, for one, is looking to sell a $350 million loan backed by the HSBC Tower in Manhattan, while Capital One is trying to reduce its exposure to the troubled New York office market.

There’s just one problem…

No one wants to buy what they’re selling!

Still, investors should get used to headlines like this.

Roughly $1.5 trillion in CRE debt needs to be refinanced over the next three years.

To make matters worse, interest rates keep climbing…

Below, we can see that the yield on the U.S. 10-Year Treasury Yield has spiked over the past several months… rallying from 3.3% in April to 4.2% today.

If the 10-Year yield breaks above 4.3%, it could easily rally 5% next.

That would exacerbate problems for the economy and CRE, which are both floating on a sea of debt.

So, what should you do about this?

Well, we’re not looking to short CRE just yet at The Discount. That’s because this crisis is looking more like a slow-motion train wreck… than a flash crash (for now). Many CRE stocks have also been hammered already, with many trading at multi-year lows.

Our focus is instead on protecting our wealth over the long run, and cashing in on shorter term trends with swing trades.

We like to diversify in terms of time frames.

1. Long Term

2. Mid Term

3. Short Term

There are several asset classes that we simply buy on discount and hold them. Hence “The Discount”.

We do view everything as a trade, so eventually we take profit, but the long-term trades we don’t stress over the month-to-month.

Our mid-term trades have been outstanding with recent wins ranging from 100% to +400%.

If you remember our weekly “The Inverted Yield Curve: Harbinger of Gloom & Doom”, you will have insight into how we time the market with our long term trades. If you have a 401k or long-term investments, this is a must read.

Also, the yield curve has been inverted for over 14 months now. So, the time to get defensive may be approaching rapidly.

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See You Next Sunday!