The panic that gripped financial markets in March over the regional bank bailout, which was in large part due to exposure to the foundering commercial real estate space in general and the office sector in particular, is all but forgotten even though in the six months since underlying fundamentals have only gotten worse, underlying cash flows in the CRE space have slowed further. In fact, the only thing that has changed is the record amount of “papering over” the Fed has enabled with the central bank’s BTFP facility hitting an all-time high every week. Meanwhile, if one eliminates the impact of the BTFP program, which is scheduled to sunset in around 6 months, regional banks are effectively insolvent as the following chart showing large and small banks’ cash/assets with and without BTFP makes clear.
But not everyone has decided to just ignore the elephant in the room, which represents a staggering $2.5 trillion in debt maturities and rollovers at much higher rates, over the next five years:
Speaking to Bloomberg TV, Kyle Bass said the US banking industry will lose hundreds of billions of dollars from exposure to the office market amid shifting workplace trends and elevated interest rates.
“Banks in the US will lose $200, $250 billion in office over time here,” Bass, founder of Hayman Capital Management best known for correctly predicting and profiting from the bursting of the subprime housing bubble, said on Monday. “And there’s about $2 trillion of equity in the banks so it’s like a 10% hit to US banking equity.”
According to Bass, who echoes our views on CRE, office space is the main sector that will report losses in the commercial real estate market, while industrial and multi-family will remain strong.