The Commercial Banking sector has a lot of debt, but it has a lot of one particular type of debt. and that is commercial real estate debt. And unfortunately, commercial real estate hasn't been doing a super fantastically mostly because of a return. Oh, away from work at the office that is, we've seen Office Buildings and Retail kind of collapse in the needs that companies have and now it's sort of weird because post Covid, for example, we saw shopping malls like the Simon Property Group see this Resurgence of traffic and we saw offices reopen.

so you had this Resurgence of traffic to offices. But unfortunately, that Resurgence while it may have been a nice retracement of about 50 percent, it quickly tapered off and slowly continued to decline. And that is not great for people who hold commercial real estate debt specifically because in a rising interest rate environment, individuals or companies who hold commercial real estate debt generally have to refinance after a few years. That's because they don't have the Privileges that home buyers do, which is the privilege of a 30-year fixed trade mortgage.

Now, in some commercial settings, you could ask for a 30-year fixed rate mortgage, but typically you're paying, uh, excessively High fees in order to get that. So instead, generally what you're looking at when you're looking at a commercial style mortgage is you're going to be looking at, uh, maybe something, some kind of debt that's amortized over 20 years, but then do in three, five, or seven years. I'll show you how that looks on the iPad here. So if we jump in here and we say you take out a loan of let's say 10 million dollars a year, Uh, zero.

And let's say that loan is a three percent interest loan and then time goes on and this loan is amortized over 20 years. Which actually means after year 20, it would be 100 percent paid, right? But instead of actually making it all the way to year 20., this particular loan is going to be due and payable after year seven. This would be known as a balloon payment where all of a sudden you'd have to make a large payment on the property, probably somewhere in the neighborhood of 60 to 70 percent of the debt and what you would do in this case. Unless of course you haven't been paying down any principal and you'd have, then you'd pay down zero and you'd have to pay down the whole load.

So in this scenario, you would need to refinance. Well, how does refinancing work If your year 7 is potentially 2023 or 2024? Well, rates are expected to be Uh, for somebody in this situation, potentially two to two and a quarter times as high as they used to be. That makes it extremely expensive for commercial real estate projects, whether they're office, retail, hotel, or otherwise to actually survive. Because now all of a sudden, properties that may used to have been cash flowing properties are now substantially cash flow negative.

And if there's one thing we know we need in a recession, it's cash flow. We want cash flow. We want money coming in. Uh, more money coming in, Then money is coming out.

Obviously it makes sense to, uh, you know, want more, uh, expenses, or or to spend more money on businesses or commercial developments in a recession because it could be an opportunity for you to make money right. You make an investment at a low part in a market. Maybe that's the perfect time to take advantage of fear in markets and actually invest in your business or your commercial real estate. The problem is in new commercial real estate though, or new business ventures.

The problem is all the old stuff. all the existing malls, all the existing offices. what's going to happen to them? and how bad could that end up being for the banking system? See if banks hold a substantial percentage of commercial mortgage-backed Securities and if those mortgage-backed Securities potentially start defaulting? What kind of stress could we actually see on the banking system as a result of this? Well, let's analyze exactly that. JPMorgan has a fantastic piece on this from just about a day and a half ago here.

and as you see: JPMorgan Commercial Real Estate Overview: And they talk exactly about the stress in the banking system and we really don't have to go too far we can. They give us a wonderful overview here, but it's It's a little slightly dense, but I'll give you a good summary here. So so the first page. fantastic Summary: Let's start here: Commercial Real Estate is very topical and top of investor Minds due to weakness in the office Market Driven by work from home trends and this to some extent is true.

We have a lot more work from home now than we did pre-pandemic although there is some reversal to work from home. and so it's worth making a little note. and I'm going to help you answer this in this video and it's also important for my real estate startup House Hack. But keep this in mind: Where is work from home reversing, right? So where is it going away? Where is that work from home? Trend Going away And where is it going to? We're going to want to analyze that.

So the concern is augmented by the current weakness in Regional Banks and a wall of maturing loans across the ecosystem. 60 percent of mortgage-backed security Bonds Commercial are held by banks. That means banks have an acute exposure to commercial real estate. Finally, we're also watching retail, but clearly that Outlook is a little bit more dependent on the macro backdrop.

In this report, which we jointly published with our colleagues at the SPG research, we take a top down and bottom-up view of real estate and we estimate the total exposure all right. So according to the Mortgage Bankers Association Commercial Real Estate Mortgage Debt outstanding is roughly 4.4 trillion dollars in total. uh of which 38 of of commercial real estate debt over here. Uh, that's uh to be different from these maturing loans is with banks.

So take I want you to break that apart for a moment because I Know that could be a little tricky. so let's break that apart. What they're saying is of remember how I made that little chart of the ones that were doing payable right? All of a sudden, they have to refinance right of the due and payables the maturing one. All right.

these are the maturing loans of those 60 are with banks of the non-maturing which means they still have time in them, 38 are with banks. So in a weird way, you actually have a disproportionate exposure now in commercial real estate at the banks because of when most of these refinances were conducted initially or initial financing. All right, excluding multi-family exposure. Total commercial real estate is 2.5 billion, of which 44 is at Banks U.S commercial Banks Also, if they give us some numbers here, but we want to know what the pain is and and uh, where some of the investors are in this right? So life insurance are major investors in commercial mortgages both on whole loan and uh, uh and Commercial mortgage-backed Security Broadly, these would be outside.

Uh Banks You could see Banks hold a lot more exposure uh than life insurance life insurance holding about 11 to 4 so relatively low. But I suppose of of a big number or a small percentage is still a big deal. Uh, and so they gave us some good numbers here. And here are some of their expectations of what they think in terms of default.

We expect that about 21 of outstown understanding office loans will end up defaulting 21 default and JPMorgan is going to write down because remember, a default just means you stopped making your payment. It doesn't mean that there wouldn't be any kind of recuperation, right? You wouldn't just lose 21 of all that money. And the reason is there's there's still an asset left right when somebody liquidates a property. So let's say you have a 100 million dollar building and the bank forecloses on it.

Or whoever whoever holds the note forecloses on it, they might still get 70 million dollars after all is said and done, so they might only be upside down in this case, 30 right? So just keep that in mind. That's why you might see a lower loss ratio after default. So if 21 of commercial mortgage-backed Securities default on office loans, that could lead to losses of about 8.6 percent. Now that's actually really interesting because uh, and and these defaults could potentially go as high as 28 to or to 35 leading to losses around 13 18.

Basically, office is going to have a big little set of losses coming up now. Who owns most of these losses? Well, unfortunately, the banks. Now, why is that bad? Well, more Bank losses on their mortgages and their portfolios on their commercial mortgages. uh, means less cash on hand for depositors and we're experiencing one of the fastest Bank runs that we've seen in history.

Part of that is driven by a technological Revolution where it's very simple now to look for a money market fund or go to Treasury.orak.gov and invest in treasuries into a money market into a CD into any fintech that's offering you higher yields than the large Banks So it's very easy to take your money out of the large Banks Put, put it into a Fint tank or a money market fund and you could do that all from the comfort of your phone. You don't even actually have to run to a bank anymore. So while at the same time we're seeing this liquidity drawdown, we're also setting up for potentially large failures in commercial real estate, specifically in the office segment. So this is really bad.

And they talk about separating uh REITs here into two different buckets. Uh, they're separating them into property owning Equity REITs and then commercial mortgage rates. And they talk a little bit about uh, read losses, but they seem to be less uh Salient or important than um, uh than the office sector. But they do apply here a a loss on some of these REITs as well.

and they attempt to calculate some of the pain that could happen here. They do talk about how potentially loss rates could be lower because of banks willingness to amend and extend loans. However, that could be risky in the environment of a bank run. So uh, let me try to simplify that.

What they're saying is, hey, look, when we compare back to the global financial crisis, the Great Financial Crisis maybe back then Banks were actually less likely to take losses on their loans because they were willing to negotiate payment terms. Now that's really interesting because if you can negotiate payment terms, you don't necessarily take the loss on the loan. But if you need to sell the loan because your depositors are freaking out, then you're less inclined to negotiate and you're essentially more likely to foreclose because you need the capital. That's essentially a rough summary of some of the argument that's being made here.

Uh, and to some extent, that's actually scary. In addition to that, Regional Banks today are a lot more stressed, which reduces their ability to amend and consent to loan modification. See, that's sort of the idea here that hey look, the more stressed the bank is, the less likely they're able to work with you if you default on your loan with the banking system. Uh, so the overall exposure ratio to to Uh to commercial real estate is really high.

You can see these substantial losses of uh, tens to potentially hundreds of billions of dollars for banks and and why that's so important is because think about this: the Federal Reserve's Emergency facilities combined with FDIC over the last two weeks have essentially provided around 300 billion dollars of liquidity. Well, that same amount of liquidity or nearly that same amount of liquidity could evaporate thanks to commercial real estate valuations plummeting. So commercial real estate a massive factor of potential pain that we're paying attention to right now. But it's not all commercial real estate.

and I find this really interesting. A lot of people talking about the next shoe to drop. This here is an interview with Bloomberg and you've got two real estate folks over at Bloomberg discussing this. They say a lot of people are talking about the next shoe to stop, a next shoe to drop being on the property or real estate side.

And obviously there's a lot of concern about exactly what's going on with Office Buildings Just the interest rates going up in general tends to be bad for Real Estate as a broader category. So I think this is something we really need to dig into. And so they say yeah, Absolutely. I Mean, after all, real estate is a highly leveraged industry, and usually when rates are stable, it's actually not terrible to have higher debt on real estate because your payments are predictable, right? and generally your rents are predictable.

But right now rates have become almost unpredictable. So anyway, they hear they touch on this working from home thing. But when they talk about working from home, uh, and and they talk about this, this double whammy. basically of like your loan resetting, your loan resetting is coming up to that seven year uh, refinance window, right? That's your loan reset.

Uh, and then combine that with work from home. All of a sudden, you're in a very, very precarious situation compared to where you were in 2019. Now some are making the argument that all of this is just fun. So the fud argument is, look, uh, work.

A work from home is great, but offices are needed. and because of, uh, E-commerce fud, less building is being done. Uh for offices? I Mean, who really wants to build, uh, an office right now, right? So the argument here is okay. On one hand, mortgages for commercial real estate are resetting.

People might be losing a lot of their office space as tech companies sort of re-jigger and layoff and downsize. But because less office is being built, maybe there'll be a supply constraint and maybe there could actually be an opportunity in office. And I always love the counter argument. I Think the counter argument is always fantastic, but they make a really good point that it's not going to be all office.

And this I think is very interesting. Look at this segment here if you're talking about: New York City Return to office. We're still well below 50 occupancy rates, People actually using office space are in the 30 to 50 range. Now specifically about New York Before we talk about where they're positive, specifically on: New York You have a lot of office buildings in New York that were built in the 60s and 60s.

Office Buildings are not ideal. I will explain why a 60s office building is not ideal. a 60s Office Building looks a lot like your uh, very sort of uh FBI style Square building. Uh, let me see if I can get you an example here.

You know what? I'll do exactly that. I'll pull up. Let's do like. Uh, let's go mid century, a little past mid-century 1960s office building and uh, let's see what we get here.

Uh yeah. okay, perfect. So we'll go ahead and pull these up. This is your kind of classic, uh, mid-century 1960 style office building right here.

where you you see these frequently with Federal buildings. they have small windows at the outside and then a lot of office space on the inside. Let me show you why graphically that is actually really important why I'm describing them. So if we go here and we say we have natural light that comes in potentially to these Corners to sort of the edges here of the office building.

what you actually have in the middle of the office which is where the bulk of the square footage is the middle of the office is actually a very dark uh, and dare I say somewhat gloomy space for a 1960s office building and you have massive problems in New York right now because that Central Area can't be redeployed into two very important things. There are two very important things you want to do with offices. Number one, Can you make condos? Well, no, because people want light. People want a lot of Windows People don't want to be in the red, so you've lost most of your real estate on every floor of these old.

Office Buildings for a lack of light. Uh, and number two, do you want? How about, How about new offices? Oh, but wait, what do people want today In a new office? Modern, contemporary, uh, co-working spaces, right? They want a fiber internet. These these buildings A lot of them built post-war in New York Uh, specifically around like Third Ave and a little bit more on the east side. They're nearly worthless and it's really incredible.

But a lot of the office space that is actually vacant is nearly unusable. So so that actually creates a little bit of a counter argument to this idea of uh oh well. Well, maybe um, uh, you know, maybe the office uh, segment, uh will be so terrible because well, actually it could create this double whammy where on one side you have more defaults on buildings like this that are unusable, but at the same time then you have a lack of inventory for stuff that people actually need. They have this weird like banking crisis fueled to the fire, but potentially something that actually props up the quality.

office. Market It's pretty remarkable. Uh, but let's go back over. Where were we? Let's go back over here.

and uh, let's go to the uh. Actually, let's go here. and let's go back to the story here. So the story is right here.

So if you go to the Sun Belt in contrast, there is a lot and there are a lot of reasons for this return to office and the use of office space is a lot higher than in New York It's not surprising then to see that at 60 70, maybe even a little bit higher than that in terms of occupancy. So there's a big difference between how people and say New England are using office versus let's say Tampa or Florida or Austin and what have you? And now this is actually I Think very, very important. Because think about this. So watch this.

If work from home, uh, work from home trends away. That is less work from home going forward, then where do you want to buy real estate? Well, how about where the new offices are? That would be ideal because where the new offices are. Uh, guess what? people have to live. So that means people want to live there because they have to be close to their office.

You can't remote from home work, you can't work remotely and be in the office. I mean I Know there's hybrid, but to some extent, you still have to be there. So there's this big argument that actually says the Sun Belt regions of Texas Florida North Carolina Atlanta Arizona SoCal Uh, potentially to some degree. Utah Although that's not really.

Sunbelt Uh, these areas could potentially really be quite desirable for real estate investment longer term in the short term. Yeah, to some extent we might see some fuel added to the banking crisis fire, but in the longer term, we might actually see opportunities out of this, and this is where those opportunities might be. Let me see if there was anything else we wanted to note here in this story is a little bit more. Uh, by the way, it's worth noting that even though I'm not a big proponent of of people using uh, Buy Now, Pay Later I I Really don't like it.

a lot of people have been asking for it anyway and so we provided by Now Pay Later and I want to give you some stats here We provided Buy Now, Pay Later. For those of you interested in joining the programs on building your wealth, link down below. and of those who signed up yesterday 50 percent I Want to say it was even slightly above 50? It might have been like 52 or something. 50 to 52 percent of of people who signed up yesterday.

Uh, for the programs of building your wealth lifetime access use Buy now, pay later. The most popular was a firm, followed by Clara I Thought that was very interesting. Sort of a little insight that there there is I mean like it or not, there's there's a demand for a product. You know, it's kind of like a grocery store.

You could be totally opposed to taking vitamins. You could be. You know, one of the the naturalists who's like I'm not taking vitamins, right? But the reality is fifty percent of Americans take vitamins. So are you just not going to carry vitamins in your store? So I find it very interesting.

But anyway, I thought you all might appreciate that. Uh, that. Insight All right. continuing.

if you were to go back to Q3 2022, not so long ago, the read Market was down more than 30 percent. here. Today, that's the Reit stock market, But believe it or not, private valuations, we're still up more than 10 percent year-to-date on a year-to-day basis. This is true.

that's true. Go back to about June The REITs were super discounted, but that's really potentially because they haven't taken the private markdowns yet. There's uh, what happened is the listed market, so that's publicly traded REITs is always a leading indicator for the private. Market That's actually a fantastic way to look at it.

They go down before the private Market Well, that's because the stock market is so much faster than the uh, you know, private real estate market. To some extent, you could say this about private Equity as well. Why is it that? Why is that The case? Well listed reads: get a mark on them every single day people buy and sell stocks. On the other hand, valuing a property can be hard if you get appraisal, etc etc.

Yeah, uh, very good point. Um, this is interesting this I completely agree with and so I Want to point this out. The first way we think about distress is that distressed sales as a percentage of overall transaction volumes right now are very low. Very low.

They're very low. Distress sales I Just saw my first short sale in potentially 10 years or more. It was crazy I said shorts Hill like oh my gosh, it's been a while since I've seen somebody selling a property short. That means you're selling a property that you owe more money on than it's worth the stress.

Sales are very low right now I Don't think they're going to stay low I Think they're going to increase. But the reason distressed sales are low right now is that Banks haven't started foreclosing on their loans and the spread between buyers and sellers is pretty wide. Distressed sales are low. and while we can talk about delinquencies like Cmbs Commercial Mortgage by Securities and Bank delinquencies, distress sales are the first thing I look at, it's showing signs of ticking up and I think it's going to arise.

Yeah, that's that's not great to answer your question up front. It can historically take 12 to 24 months for private property valuations to correct to what the listed Market is pricing this is talking about REITs This is why I think there's there's not as much of a rush to buy real estate as as people believe. Uh, right now that's why we're targeting Q3 Q4 for house hack. About 15 to 20 of maturing debt is coming due each year over the next five years.

This has to do again with the commercial. With an average of 500 billion dollars per year, most of the debt coming due in 2023. Uh was originated between 2013 and 2018. property prices have risen since 13, so the loan to value is lower.

Uh, even if valuations fell 10 to 30 percent next year, there's a good chance these loans are not underwater yet. This is the case. Uh, this is not the case for offices or malls. Mall's effective loan to values are around 90 to 95.

There's probably a good case study for where the office Market is going. Office properties account for only about 25 percent of the 15 to 20 percent of maturing debt that's coming due. And who holds that? Well, a lot of it are bank balance sheets. And so this is where when Banks hold a lot of this debt that's coming due, you could potentially be amplifying the banking crisis.

As we've said, and this will ultimately pressure valuations lower. And it's not just in commercial real estate, but if there's distressed debt in single-family real estate as well uh, then uh, then you're likely to see pain there. Also, I Personally think we're likely to see an explosion of inventory over the next uh, probably I would say uh, six months. So if I had to give a prediction, if I had to give a prediction, I would say over the next six months, you'll probably see inventory as much as 5x.

Now that that sounds incredible, because inventory is so so low right now and we think to ourselves, why would somebody sell Who doesn't need to sell? Well, the reason people might sell or they're an institution, they need liquidity. They're a bank, and they're foreclosing, they're read, and they need to sell their a pension fund. and they need to divest their family office and their divesting. Uh, there are plenty of reasons that people might sell.

uh, it could be a collapse. and Airbnb valuations potentially because Airbnbs maybe aren't renting as much as they used to. And then those individuals try to go rent their properties long term and they're frustrated. They think, okay, well, I'll just rent the property for a year or two until the Airbnb Market comes back.

But then after they rent out the property, they realize I don't want to be a landlord and all of a sudden they sell that rental or worst case scenario, they leave the house vacant. There's somewhere around a a 15 a set of 15 million properties in America that are vacant. Most of those are vacant because of poor management. Terrible.

Property Management People don't know what they're doing in real estate. They haven't taken the zero to millionaire real estate investing course. there's a do-it-yourself Property Management Course, but vacant real estate will decay and eventually when that vacant real estate hits the market, it will hit the market at depressed prices. So I believe that over the next six months we can see inventory 5x and there will be glorious opportunities to invest in real estate.

Q3 Q4 Q1 It'll be great. We'll see. uh, but that's my take regarding the stress on commercial real estate on banking. I Think it's a very legitimate concern that could amplify the banking crisis and could continue to tighten credit standards at Banks which has a very depressive effect on our economy.

we can see consumer spend plummet uh, some say up to about 10 percent and that's not so great for especially the lower end consumer. But Ultimately, all consumers even losing 10 percent of the higher net worth individuals. uh, and and 10 of their spending goes away. Now you're comparing to higher comps and you have a little bit more of a uh, an earnings per share fight, so it's a rough time going forward.

As an individual, How all this applies is again: I would make sure I'm with well within FDIC limits and diversified in my Banks then I would continue to try to make as much money as possible and I think that's very important to work very, very hard. But I would also consider when you're investing the work from home. Trend: Take a look at this. This is a Wall Street Journal piece from this morning.

Working remotely is becoming listen to this phrase increasingly rare. Just a few years after, the pandemic caused multiple, well, countless of millions of Americans to work from home. some 72.5 percent of business establishments said their employees teleworked rarely or not at all Last year. According to the labor Department, that figure climbed from 60.1 percent in 2021.

and they s the survey showed about 21 million more workers on site full-time in 2022 compared to the prior year. The new number is also closer to the share of establishments 76 percent. That said, they had no employees teleworking before commit the pandemic that were open in February 2020.. employers have recently begun pushing harder to get staff to work on site more as recession fears prompt increase emphasis on worker productivity.

It's true the easy days are over. now it's now it's hard work time. You get the same thing happening at uh at Apple as you have at Meta. Look at this: Starbucks has also asked office staff to come in more often.

Walt Disney is pushing for a four day on-site work week. It's incredible. Uh Robert Half which is sort of a recruiting and temp agency, says that. A survey by Global A Global A survey by the Global Recruitment Firm found that 92 percent of managers prefer their teams to work on site.

The hypothesis is it's still easier to build trust in person and that those relationships help us work more effectively. They couldn't be more correct. This is why we have a requirement uh at my companies to work in the office. any new hires have to be in the office, have to be on site.

We don't do remote work, so that's the the first thing we do with an application. Is they say remote work? No thank you? Uh, we're pretty clear about that though. So it's also kind of uh, not following instructions when people apply anyway. But that's okay.

So I think it's very interesting and to me this, this is a big deal for Real Estate You know, just in the last golly uh month here I think I've been across the United States I mean countless times, but uh, but on somewhere around 80 to 90 different flights and uh, I I See this this? Uh, this this trend towards City centers Again, it's It's incredible. It's almost on. It's almost Amplified right now. Whether it's St Petersburg Tampa Dallas Austin uh, you name it, it's pretty incredible.

Pretty incredible. uh, so. But again, as an individual, my thinking is, uh, do whatever you can to make more money. If that means moving to an area where you could work in person with a business that's fantastic, you should do that.

Curious to see where you're going. Leave some comments in terms of where, uh, where you're seeing people move in your workplace. Uh, and uh. make sure you make, uh, make some more money.

Get ready to invest in real estate. There'll be some great opportunities coming up. Check out the programs on building your wealth link down below and uh, good luck to the banks! I Would not want to be a bank right now and I would not want to invest in a bank right now. Given these sort of uh, stresses and losses that that are still coming and haven't been fully realized yet.