Time is running out for the commercial real estate (CRE) sector.
The ticking time bomb hidden deep within this sector is showing increasing signs that detonation day is fast approaching.
Yesterday, another well-known retail store announced that it was closing nine stores across four states.
And the reason is extremely concerning.
Today, I’ll share what that reason is, its significance, and why it is just one of three major warning signs that the commercial real estate market is about to explode.
I’ll also give you one last opportunity to hear my colleague Stephen Hester walk you through how to prepare and profit from the upcoming explosion. And for those who tune in before midnight tonight, I have a special offer for you. So read on to find out what it is…
A Major Retail Store Closing Multiple Stores
Target (TGT) made a huge announcement yesterday.
The nine stores across four states it’s closing are all due to out-of-control theft.
And Target is not taking its time about it. Before the end of October, those locations will no longer be operating.
In Target’s own words, “We cannot continue operating these stores” due to “theft and organized retail crime.” It is no longer safe for shoppers and employees alike, and unsustainable for their balance sheet.
Although Target believes it serves an “important role” in the communities it serves, it “can only be successful if the working and shopping environment is safe for all.”
Sadly, Target is not alone…
Walmart also closed multiple store locations this year. And other retailers such as Home Depot, Lowe’s, Dollar Tree, Dick’s Sporting Goods, and Ulta – all reported a large increase in crime and stolen merchandise.
These stores cannot afford such major hits to their balance sheet over the long term. And the problem is bigger than most people know.
Warning Sign #1: Crime Rising Across CRE
The National Retail Federation recently reported that retailers’ lost inventory, a category that includes damaged and stolen goods, rose from $93.9 billion in 2021 to $112.1 billion in 2022.
And 2023 will likely beat even that.
I interviewed Brian Harris, CEO of Ladder Capital – a mortgage real estate investment trust, or mREIT, that helps finance property growth – earlier this week.
And he agreed that crime is taking a toll on real estate.
It’s not the properties, their owners, or renters’ fault, he pointed out. But they are paying the price regardless.
And when commercial real estate balance sheets start taking major hits they weren’t expecting… it’s a lot harder to pay off any debt that is coming due.
Warning Sign #2: CRE Loans Coming Due
As I’ve been mentioning for weeks, the debt coming due for the commercial real estate sector is one of the biggest warning signs that a CRE crash is imminent.
According to the Mortgage Bankers Association’s estimates, $728 billion (16%) of all commercial and multifamily mortgages will mature this year, with another $659 billion (15%) piling on in 2024.
All this so soon after the 2020 shutdowns depleted so many CRE owners’ ability to save. Knowing that, you’d better believe that lenders are going to be pickier about who they do business with and how.
In which case, expect heightened defaults and foreclosures from here.
Warning Sign #3: CRE’s Enormous Interest Rate Problem
Amid all this, commercial real estate has a third problem in the form of interest rates.
When those go up, it’s only natural that values go down. Most of the time, CRE owners can prepare appropriately for that kind of business environment.
But interest rates have risen very high very fast this time around… And after months and months of initial assurances from the Fed that no such thing would be necessary.
(Does anyone remember “transitory” inflation?)
This is especially problematic for the office sector, where fundamentals are far from recovered. The retail and even hotel categories have bounced back much more strongly than expected since the economy reopened.
But office buildings continue to struggle, especially in major metropolitan hubs like New York City, San Francisco, and Washington D.C.
This brings us right back to foreclosures… Under the current rising rate conditions where savers are increasingly rewarded and borrowers are increasingly burdened, it’s just one more challenge for companies to service their floating-rate debt.
Already, the last nine months have seen the pace of defaults and distressed exchanges hit multi-year record levels. And if the Fed does indeed raise rates even just one more time…
Well, things will only get more difficult from here. CRE vacancies will rise across the board, even in strong sectors like industrials, or warehouses.
And certain areas of the country will likely suffer more than others.
It’s Time to Prepare
That’s not to say opportunities to profit have all disappeared. There are still pockets of safety out there, if you know where to look.
But I do recommend you exert additional caution going forward.
Which is why Stephen and I recorded an urgent briefing about the culmination of these very factors I laid out for you today – and which all my research and contacts are confirming…
We lay out all the potential sectors at risk… And better yet, share how you can profit from the chaos that’s brewing just under the surface.
But the chance to hear about this opportunity is running out. At midnight tonight, this video will be taken offline. So tune in while you can to inform yourself… and prepare.
And in the meantime…
This story is far from over. So stay tuned. We’re sure we’ll have plenty more to report ahead…
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily