Distressed Commercial Real Estate Sales Could Eclipse Number After Financial Crisis

It appears the government lockdowns in response to the COVID-19 pandemic has hastened the deflation of the commercial real estate bubble.

According to CoStar Group, an estimated $126 billion in commercial real estate will be forced to sell at distressed prices over the next two years. That will eclipse the amount of distressed commercial property sold during the first two years after the 2008 financial crisis.

In the years after the great recession, commercial real estate boomed, pumped up by easy money from the Federal Reserve. Real estate mogul Sam Zell warned about the bubble in commercial real estate back in 2016. In 2017, we reported on the apartment building boom. As with all Fed-induced bubbles, it was bound to pop, but it appears the pandemic has hastened the process.

According to CoStar, distressed hotels, retail space, office buildings, and other commercial properties will continue to flood the market for the next five years. Analysts project the market could potentially reach $321 billion in distressed sales by 2025. In the worst-case scenario, it could swell to $659 billion.

Mortgage delinquencies on commercial properties have skyrocketed during the coronavirus pandemic. According to data compiled by Statista, hotels have been hardest hit with mortgage delinquencies increasing from 2% to 11.49% between May and June. Retail property delinquency spiked from 3.8% in May to 7.9% in June. Mortgage delinquency on office buildings only showed a slight increase between those two months, but it is expected to accelerate as more people transition to work from home.

The surge in corporate bankruptcies could put even more pressure on the commercial real estate market. A total of 509 companies had filed for bankruptcy this year as of Oct. 4, exceeding the number of filings during any comparable period since 2010.  That was piled on top of the 54 companies that filed for bankruptcy protection in August.

Meanwhile, nearly half of America’s small business owners fear they won’t make enough money in Q4 to remain in business.

There are similar problems in the housing market with 17 million Americans behind on mortgage or rent payments. Record low mortgage rates have creates a strange situation where the housing market is red-hot even as millions struggle to make their mortgage payments.

This underscores the fact that despite optimism about a vaccine, nothing has fundamentally changed in the economy. And even if they cure COVID, it won’t instantaneously fix the economy. As Peter Schiff has put it, there is no vaccine for what ails the economy.

The US government will almost certainly pass a massive stimulus bill to prop up the economy a while longer. That means more debt and more Federal Reserve money printing. But as Peter has been saying, this so-called COVID cure is what’s making the economy sick.

The real burden is not the COVID, but all the debt the economy accumulated while the Fed was trying to fight COVID. It’s the COVID cure that is far more harmful to the economy than the disease. So, even after the disease is gone, the cure is going to linger and is going to continue to do damage because we accumulated all this extra debt, because the Fed’s balance sheet is now so much bigger, because the stock market bubble is so much bigger, because the real estate bubble has gained new strength, because everybody has more leverage than they did before. And of course, the US economy is going to be less efficient in this post-COVID world as US companies are still going to have to be covering the costs of being able to prepare for the next lockdown or the next virus that comes up. We already know what the playbook is.”