According to economist Peter St Onge, a weakening commercial real estate sector could be a canary in the coal mine for the US financial system as a whole. In a new video update, the analyst claims that growth in major US urban areas appears to be slowing, which could wipe out a slew of real estate firms that are leveraged and indebted to regional banks.
According to St Onge, if interest demand for prime urban real estate cools, US banks will pay dearly for the decline of the American city. “We are now witnessing a mass extinction [of poorly run businesses and real estate projects] now that money is no longer free, thanks to Fed rate hikes.” In fact, the prime rate, which is the interest rate offered to the best companies, is currently at 8.25%. This is up from 3.25% for the majority of the previous 15 years. However, we have an economy that has evolved into cheap money, and that cheap money is no longer available.
All with the added bonus that many of America’s cities – 85% of Americans live in cities or suburbs – are so poorly run in terms of crime, quality of life, and regulatory and tax harassment that businesses are fleeing or closing up shop entirely. All of this, while post-COVID remote work means that millions of workers no longer have to endure the newly deplorable cities, and they, too, are fleeing.”
The analyst warns that the true scope of the problem has not yet become apparent. According to St. Onge, the combination of bleeding government bonds, rising interest rates, and massive amounts of bad loans sitting in regional banks could create a perfect storm that causes major economic fallout. I mentioned that the storms haven’t even hit the banks yet. So far, it’s primarily been melting government bonds and acquiring banks one by one – as in, they have assets paying 2% or 2.5% while their debt is closer to 5%.
However, commercial real estate accounts for approximately 43% of regional bank loans. They specialize in this because they know the area well, with 40% of their space dedicated to office space. As a result, both are directly in the crosshairs.
When we add it all up, we get a death sentence for regional banks that, given the size of the bubble, could spread across the entire financial system as higher rates kill businesses, they stop paying rent, and real estate suffers from additional stresses from consumer defaults.”
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