Daily Archives: March 13, 2017

Is commercial real estate going to drive the next financial crisis?

Here’s a dark view that may cause more than a few sleepless nights if you’re into economic predictions.

I’ve blogged before about the linkage between the failure of the big retail chains and the fate of what remains of the newspaper industry, since advertising by those chains has long been a stable source of income for publishers. Newspapers used to be the primary place for real estate, help-wanted, automobile sales, and classified, all of which have now migrated to competing digital platforms. The implosion of Sears, J.C. Penney, and others is just another big shoe falling.

Now an old friend and successful blogger, Charles Smith, now predicts that what we’re seeing is likely to turn into the next massive financial crisis. Commercial real estate, including the companies that built or own those empty malls and buildings across America, has been built on credit, just like the housing market that crumbled in 2008.

With malls and office buildings facing tough times, Smith predicts there’s going to be big trouble when these loans come due and can’t be rolled over due to a lack of remaining equity.

Talk about an overvalued market set up for a fall. It isn’t just malls becoming empty retail wastelands–it’s Corporate America shifting to flex-work and work-at-home, slashing the need for floor after floor of costly business-park office space.
It’s about restaurants moving to smaller spaces as they move to serving more meals via delivery services.

Commercial real estate is grossly overbuilt in retail and office space. Combine sky-high valuations with cratering demand and billions in short-term CRE loans that must be rolled over into new loans, and we don’t have a liquidity crisis, we have a collateral crisis– the assets supporting the debt are no longer worth the loan balance.

Unless the Federal Reserve intends to buy up every dead and dying mall in America, this is one crisis that the Fed can’t bail out with a few digital keystrokes. Gordon T. Long and I discuss this brewing crisis and its potentially devastating consequences in our program, Is Retail CRE The Next Financial Implosion?

His “Of Two Minds” blog is worth being on your reading list. Whether you agree with his analysis or not, it will make you think.

Trump budget to signal huge retreat from world affairs

Foreign Policy magazine is reporting that the Trump administration is going to propose slashing more than half of what the U.S. spends annually for United Nations’ programs (“White House Seeks to Cut Billions in Funding for United Nations“).

And it’s not just the U.N. facing big cuts, but funding for other types of foreign assistance and even the State Department itself.

FP says the moves signal “an unprecedented retreat by President Donald Trump’s administration from international operations that keep the peace, provide vaccines for children, monitor rogue nuclear weapons programs, and promote peace talks from Syria to Yemen, according to three sources.”

And what will this mean?

Richard Gowan, a U.N. expert at the European Council on Foreign Relations, said cuts of this magnitude would create “chaos.”

This is a single-minded selfishness of a sick billionaire’s view of the world that, if actuallly pursued, is going to come back to bite us right you-know-where.

Even without dealing with what this says about the lack of simple human empathy or caring about others, the president’s people seem blissfully unaware that the U.S. is less than 5% of the world’s population, and chaos elsewhere in the world can’t be contained or made to work in our favor.

FP cites observers who predict that Congress will not agree to cuts of this magnitude and that this part of the president’s budget, at least, is unlikely to pass.

I’m not sure that’s really comforting…