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Here Come the Headwinds. Are You Ready?

As I type this up, we are monitoring the development of Hurricane Idalia. Very interesting and fitting that we discuss headwinds as it pertains to commercial real estate and potentially the US finance markets. Recession? Possibly. Today, let's just highlight the challenges that we are currently facing in the Commercial Real Estate investment front.

  • Rising interest rates

  • Rising interest cap insurance rates

  • Rising capitalization rates

  • Rising property insurance rates

  • Rising property tax rates

  • Debt default is on the rise

  • Rising vacancy rates (office sector)

At-Risk Debt is defined by mortgage debt needing to be refinanced by the end of 2025. This is the metric that economists are monitoring today and the biggest puzzle investors are looking to solve. This is one of the biggest risks to the United States economy currently. Today, office buildings are posing the greatest risk, accounting for over $350-Billion of the total $626-Billion of at-risk debt set to mature by the end of 2025. Multifamily is the next largest category with $192-Billion in at-risk debt. But what will the economy look like by then? If interest rates remain high, it is predicted that a majority of owners will simply hand the keys back to the lenders, which will also cause a loss for their private investors. Do you see the double-edged sword? The buildings could potentially be left to go vacant, sinking their local communities, and the investors lose their investment, which would be terrible for them individually and sink the economy. Banks carry the biggest share of at-risk debt, with $303-Billion of potentially troubled loans maturing through 2025. Could this lead to more banks collapsing?

A word on inflation.

The US national debt stands at nearly $33-Trillion today. To put this in perspective, the market cap on the S&P 500 is $37-Trillion. As the government spending continues to increase, the Fed's goal is to essentially keep the real return people earn on savings below the rate of inflation. The Feds want to ease into the upcoming financial repression, to keep the interest expense below the rate of inflation by a small yet significant percentage. This means keeping what savers can earn lending to the US government below the rate of inflation. Per economist Larry McDonald, the Fed doesn't want inflation to go away. It wants inflation to stay above the government's average interest rate expense. The secondary but vital concern is that in order to effectively do this, they will have the challenge to not cause hyper-inflation. His theory is that inflation is here to stay. It's important for us to stay informed and opportunistic. There will always be opportunities to secure good investments. The key to remain truly opportunistic is to remain agnostic to the opportunities. For example, if multifamily teeters, then the opportunity may be to move vertically within the capital stack to decrease risk. Another opportunity we are seeing is to serve a debt source for the commercial real estate sector, as well as the business sector.

In closing.

In closing, as investors, it is important for us to remain true to the fundamentals. One simple fundamental is to increase risk during up-cycles and to decrease risk into capital preservation during down-cycles. Commercial real estate is continuing to shake and the headwinds are strong. However, as a mentor of mine always tells me, "there is cash in chaos if you could find the opportunities within the noise." This is where Ten15 Capital is positioning ourselves, to not only weather the storm, but to find asymmetrical opportunities to preserve and grow our wealth in uncertain times.

This is our opportunity!


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