In the last 10 years, the total value of commercial real estate loans held by U.S banks increased by 109 to 2.9 trillion dollars as of last week. Half of this increase in commercial real estate loans about 700 billion dollars turned up in just the last three years. Which is a bit of a paradox because exactly three years ago, Kovid arrived and offices became empty. Many workers learned that working from the comfort of your home is a lot nicer than cramming like sardine into an overcrowded train or sitting in traffic for an hour and a half each way every day.

And ever since, covert turned up company bosses have been struggling to get employees back into the office. We're here. rally cries from one CEO after another on social media telling their workers to start turning up because you know that is the deal that the workers agreed to when they took on the job that pays them their salary. But the problem is that the job market is hot and employers have little negotiating power.

Unemployment is at all time lows, the number of available jobs is at all-time highs. Incidentally, there are around 10 and a half million job openings in the United States at the moment, which is three times as many as there were 10 years ago, and so the huge Office Buildings that were incredibly popular in the City Center locations are now standing half empty. Companies with leases are letting their leases run out and downsizing. So how did it happen that about a quarter of the total value of commercial real estate loans sitting in the books of U.S banks turned up since covid well.

There are three key factors that have caused this to happen: First, after the financial crash that ravaged the US economy and the U.S real estate market from 2007 to 2009, the Federal Reserve lowered the race to sit at just above zero percent to stimulate the economy back to life. But after the economy restarted, the Fed was too busy giving speeches, attending Gala dinners. You know they forgot about the interest rate for about a decade. it just sat there and zero percent.

Then in 2018, Donald Trump appointed your own power to become the chairman of the Federal Reserve and Jerome Powell remembered that the FED forgot to actually increase raids back up. Even though the economy was doing well and seeing as the economy was running hot, he thought he'd give it a shot and try a few rate increases. The S P 500 lost 6 percent in 2018, but then went on the second biggest bull run in history from 2019 to 2021, growing by 90 in three years now. usually when the economy is running that hot, the rates stay high to prevent it from overheating.

In fact, rates usually go up now. Rates went up in the mid 90s to set at five to six percent, and then in the late 90s, the rate stayed at that level and increased a little bit more while the stock market was exploding from 1995 to 1999. But in 2020, Covet arrived and changed everything. Immediately after Covet Panic erupted in the US, the Federal Reserve Open Market Committee held an emergency meeting on a Sunday and drop the raid back down to 0.25 and at the same time they printed a load of money and gave it out like free condoms at an HIV Clinic.

In the 10 years before cover the right, the economy had one of the best decades in history, and with the rate sitting at just above zero percent, this meant that companies could spend exuberant amounts of money on Commercial Real Estate. Money was flowing, economy was crushing it, and everyone was trying to get that nice office in the middle of London or in Manhattan. This is the age when the likes of Wework were buying up huge offices every week, chopping them up into small cupboards with glass walls, and letting them out to startups with too much seed funding. The offices had free coffee and free beer, and the whole premise of Wework was that the game of musical chairs would just go on forever until of course the music stopped.

now in 2020 and in 2021, many of the commercial properties that were bought up during the good times either had to be refinanced or were sold to new owners. The US government was first busy murdering the economy when covert first turned up by locking everything down, killing every small business that it used to exist. But immediately after they went and killed the economy, they realized that perhaps you know that wasn't the best move and began trying to resuscitate it by pumping huge amounts of money into the system. The property Market that was already booming for 10 years went absolutely bananas.

Prices were going through the roof. Inflation on property of every type was absolutely nuts, and at the same time, many of the commercial properties acquired during the good years before were up for refinancing. And wouldn't you know it, the rates were at zero percent. so loans and Commercial Real Estate were practically free.

And so Banks were dishing out these loans right. Lesson Center at near 0 rates. It's also interesting to know that commercial real estate loans didn't increase because there was more commercial real estate. It wasn't the case that in the last 10 years of the economic boom, people built more offices.

You know the economy was expanding and that resulted in more more office space being available, because while the value of commercial real estate loans went up 109 in the last 10 years, the price of commercial real estate went up 104. So almost all of the increase in the loans can be attributed to the increase in the price of real estate per unit instead of increase in the amount of commercial real estate available. The problem with commercial loans is that unlike typical U.S Residential Mortgages they don't get fixed for 30 years and a few days ago Scott Rackler, a director of the New York Fed, wrote on Twitter that one and a half trillion dollars of commercial real estate debt is maturing in the next three years. That's about half of all the commercial real estate debt, and those loans will need to be refinanced.

The issue is: last week, the FED increased their rates to five percent almost exactly one year from the date of the first increase when they were sitting at zero because back in 2021, the Fed was too busy eating caviar drinking champagne with their mates. While inflation was increased from 1.4 percent to seven percent in the span of just 12 months, Jerome Powell was busy giving speeches on how inflation is transitory don't you worry about anything and when everyone found out that in fact, inflation did not go away all by itself. For the first time in history, rates had to increase very fast. The only times when the rates went up faster was in the 1973 oil crisis and when Paul Volcker had to hike race after inflation ran away in 1979 and 1980.

So the rates have gone up and half of all the real estate loans are up for Renewal. Commercial real estate often has a longer amortization period than the term of the loan. The point being that at the end of your term, you then have to refinance and then pay the lenders some more of those juicy fees So often a property can have a 20-year amortization schedule, but only have a five-year term. And to keep the number simple, let's say that you're a company and you can get a deal that is a 75 basis points above the Fed rate.

When you're borrowing money excluding all the other fees and costs for every million dollars or Pounds or whatever, your monthly repayment is 3769. But if you go and whack the interest rate up to 75 basis points about five percent. those repayments increased to 6291, which is 67 percent more So, although the rates only increased five percent, it's the relative increase from zero that is really causing the pain. The situation would absolutely not be the same if we were going just from five percent to ten percent, which is the sort of situation that we saw before and this makes it a ticking Time Bomb for when those renewals come up.

That could have very serious repercussions. Last week during power was basically dismissing questions on the impacts of the completely unnecessary 25 basis point hike just like he was dismissing questions about managing inflation in October 2021. But the size of the US commercial debt pile is about 10 of the entire combined valuation of the S P 500 according to FDIC U.S Banks had a combined 620 billion dollars in unrealized losses on their books as of the end of 2022 because of the increases in rates and research published last week puts that number now at more like 1.7 trillion dollars. and this problem has already collapsed.

Three U.S banks forced an emergency response from the treasury, and the FedEx had to print hundreds of billions of dollars to recapitalize the system. uh, to prevent Banks from going under in the future. and reportedly the real estate coming up for refinancing is about equivalent in value to the size of this problem. We've just had about one and a half trillion dollars.

a lot of real estate debt as much as 80 percent according to Scott regler is held by Regional Banks, which just happened to be the banks that are already carrying those unrealized losses and collapsing. And the problem is that the situation is a bit like a train heading straight for a brick wall without anywhere near enough time to stop. There are only six more meetings of the Fomc schedule for the rest of this year two in each of the remaining quarters, and the FED has now backed itself into a corner where they have been so busy telling everyone that they have to keep increasing rates. There's absolutely no other path, there's no other option available.

and at the meeting last week just a few days ago, 17 out of the 18 members of that committee thought that they would have to increase rates higher. And just like politics, stopped the Fed from doing the right thing back in 2021. It is now stopping them from doing the right thing in 2023.. you can't just do a U-turn and tell the whole world that you up real bad and just do the opposite of what you were saying last time a few days ago.

So because of this degenerate bureaucracy, these would rather save face and be slow to act, do the wrong thing, then take the appropriate action Based on data and Analysis That's the kind of world we live in. and even if they do start lowering rates at some point later this year, because of this situation, it may well be very slow and gradual to show everyone you know how considered and measured they are in making their dumbass maneuvers. So the overwhelming likelihood as it stands is that all of this commercial real estate is going to be rolling into refinancing to an environment where interest rates are 20 times higher than they were of this time last year and the banks can't just go. And you know, allow them to roll at the same rate because the banks have cost of funds that is now 20 times higher than it was the same time last year.

When you look over time, a rate of five percent in terms of rates is actually perfectly normal. In fact, it is the zero percent rates that we've had more recently in the last 13 years. Those are abnormal. But the problem we have is because we have had those rates we are now in a situation of conditional probability.

The problem here is the relative shock of going from zero to five percent quickly is what's causing the problem, not the absolute level of five percent itself. And it's highly frustrating that the FED is continuing to increase rates based on their political Ambitions despite there not being any good reason for them continuing to do so. The only two two reasons: that they're allowed to increase rates in managing economies, to ensure that employment remains strong, which it is, and to ensure that inflation continues falling down, which it is. You can't go and make inflation two percent from it being nine percent in June last year overnight.

The process will have to take time regardless of what you do to interest rates and what happens if this latest increase and this situation with the commercial real estate causes more Banks to fail. What happens if this causes many businesses to collapse, Will Jordan Power and the rest of the clowns on the Open Market Committee Sit in front of a jury and answer what data they used and what data they conveniently chose to not use to ignore when making their interest rate decisions. Will they have to explain why no action at all was taken in 2021? Why they all sat there giving all those completely idiotic speeches while inflation was skyrocketing for the first time in 50 years. Will there be any repercussions? Well, I am guessing that the answer is no.

In fact, I am not guessing I know. Oh, the answer is no and instead they will get some fancy award from the government, a nice pension, retire, and charge a few hundred thousand dollars to give a speech at the Goldman Sachs Annual Leadership Bash. And unfortunately, it is this complete lack of accountability that is causing this problem in the first place. The FED has absolutely zero oversight, no second line of control.

Whatever this committee decides gets no challenge other than half an hour of journalist questions at the press conference. And now that we're sleepwalking into a whole Myriad of problems on the back of all of this that they're doing, it is all being created by the Fed's incompetence. I'm sure we're going to get speeches about how you know nobody could have possibly predicted and the economy did this. and the economy did that.

But the Feds continued incompetence means that they are not seeing the problems as they are arising or thinking about the potential ways that they can mitigate them. The commercial real estate problem is only one of a number of these issues, but after the last few weeks with the banking sector, it could well prove the straw that breaks the backs of regional Banks. If you want to continue this conversation, discuss some of the finer details, feel free to join me in the Discord I Am in there all the time. You can sign up through Patreon in the description it's just five dollars a month.

Thank you so much for watching I Really appreciate it as always I'll see you guys later Foreign.