In 2004 and 2005, when mortgage lenders were offering 100% financing for investment properties to inexperienced investors – who did not have to verify ANY income – I and many others in the industry were convinced we’d see a real estate meltdown.

    We just did not know when, and … it took four more years to play out.

    When we’d voice concerns, we’d often hear comments like this…”Jay, stop with the doom and gloom; the economy’s on fire, and my house appreciated 13% last year alone!” (recency bias anyone?)

    I of course have been hearing similar comments this year too, with respect to my concerns about China, continually falling Leading Economic Indicators (just fell again for a record 20th straight month), mal-investment, inverted yield curves, and much more.

    Well, I have another terrifying scenario to worry us all – and that is commercial real estate – both OFFICE and MULTI-FAMILY RESIDENTIAL.

    Odd Lots recently had two fascinating podcasts about commercial real estate: What Dead Malls Tell Us About Commercial Real Estate and Another Part of Commercial Real Estate [Apartments] Is In for a Reckoning.

    We all know the story about offices: work-from-home policies and high crime rates in cities have wiped out many office markets. Class A building values are dropping as much as 75% and owners are walking away from properties – leaving lenders holding the bag.

    Similarly, once mighty shopping malls are closing down too, as new outdoor and online shopping options are wiping them out.

    Multi-Family Residential Is a Huge Problem Too!

    But, what surprised me the most was how massively overbuilt multi-family residential (apartments) is (are) right now!

    There was a feeding frenzy for new buildings and acquisitions in the early 2020s, as interest rates were extremely low, new household formations were increasing at a very rapid pace, and rents were expected to rise sharply.

    Making matters worse, many inexperienced buyers significantly overpaid for projects. Interestingly, per the Odd Lots guest, many inexperienced buyers jumped into the space because social media influencers were pushing multi-family investments so aggressively.

    So – this is another warning: Never invest in anything recommended on social media!

    Well… interest rates have gone way up, rents have gone way down, the market is drowning in oversupply, and, most unexpectedly, insurance costs have skyrocketed.

    As a result, many projects no longer generate even close to enough income to service debt and cover expenses – and those owners cannot refinance out of their short-term loans and are going into foreclosure – putting even more pressure on lenders.

    The numbers are astounding, and I highly recommend listening to both podcasts.

    So, will commercial real estate be the catalyst that brings down the economy in 2024?

    I have no idea, but it is important to remember that most financial crises start with banking crises that start with an onslaught of loans that go south, as this Wealthion podcast explains: Hidden Dynamics Behind Banking Crises.

    So, with commercial real estate on the ropes, with China reeling, with malinvestment at record levels, and with the lag effects of high rates finally kicking in… I will be amazed if we make it through 2024 unscathed.

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