Commercial Real Estate Destruction

We received the most recent commercial real estate data from Moody's this week.  The overall delinquency rate for the sector has risen to 7.5% in the month of May.  Delinquent means a commercial loan is not currently being paid.

They have upped their target for year end delinquency to 9-11% from their original 8-9%.  Their target was moved due to ongoing unemployment and deterioration in the economy.

I expect them to move the target higher as the economy moves from "deterioration" back into "total destruction."

The following shows the delinquency rates and price charts for each individual commercial real estate sector.

All properties: 7.5% delinquent.

Apartments: 13.13% delinquent

Industrial (Warehouse): 5.59% delinquent

Office: 5.59% delinquent

Retail: 6.10% delinquent

The apartment and hotel sector (13.25%) have significantly higher delinquency rates than industrial, office, and retail.  This is due to the long term leases that are signed in the latter three.  Under the surface, however, office and retail are crumbling quickly.  The supply of open space and inability for new tenants to acquire financing for small business continues to lower their income drastically.

The apartment and hotel sector should be the first to bottom in a few years.  Another 30-40% decline in prices, along with a rising interest rate environment and the coming loan resets should annihilate anyone who is still involved in the commercial real estate business.

It will then be buying season for new investors, the ones who wait patiently today in the shadows. When people look back many years from now they will not believe the buying opportunities that became available between 2012-2014.