Commercial Real Estate Bubble Nearing?

GM and BRRR.

Hope you all had a great weekend. Markets in the US are focused on corporate earnings this week with a flood of Q1 reports from big banks and tech scheduled to hit the tape.

We remain bullish on our public basket of big tech and cypto assets on the heels of last week’s encouraging inflation data and cooling job market. We think it gives the Fed enough cover to both signal and behave dovishly in the coming weeks and months, as they continue to balance the risk of bank contagion and inflation.

Relatedly, recent weakness in commercial real estate could accelerate and further damage the banking sector.

Here’s what we brrr’d today:

• This Week at a Glance

• Commercial Real Estate Bubble = Catalyst for QE?

Prediction Contest Question #4

This Week At A Glance

• US debt ceiling debate: House Speaker Kevin McCarthy is expected to address the Republicans' position on the debt ceiling, with a possible demand for spending cuts in exchange for passing an increase. The situation mirrors the 2011 debt ceiling conflict between a Democratic president and a Republican-majority House, which led to a slump in the S&P 500 and a decline in consumer confidence.

• Data releases: China's Q1 GDP growth is anticipated to be above consensus at +4.5% YoY, while April flash PMIs from around the world will provide insight into the global economy's performance in Q2. Inflation data from Japan and the UK will also be in focus, with Japan's core inflation expected to rise slightly to 3.6% and the UK's inflation predicted to drop to 9.7%.

• Earnings season: 59 S&P 500 companies are set to report earnings this week, with financial firms like Bank of America, Morgan Stanley, Goldman Sachs, and Charles Schwab under the spotlight due to market turmoil last month. Other notable companies reporting earnings include Tesla, Netflix, IBM, and Johnson & Johnson.

• Market focus on US earnings season: Rabobank suggests that the market will primarily concentrate on the US earnings season, as poor results could lead to rising unemployment, falling US rates, and reduced concerns about P/E ratios.

Commercial Real Estate Bubble

• CRE "boa constrictor" crisis: The commercial real estate (CRE) sector, particularly the office space market, is expected to become a significant drag on the US economy, leading to a potential resurgence of quantitative easing by the Federal Reserve.

• Maturity wall and bank dependence: Morgan Stanley estimates that 30-32% of CRE debt will mature by the end of 2025, with banks holding 42-56% of maturing debt, creating a substantial risk for both the banks and the CRE market.

• Post-COVID occupancy problems: Office spaces face structural occupancy issues due to the pandemic's impact on work habits, resulting in extremely conservative lending standards, even for trophy properties, and exacerbating the sector's vulnerability.

• Record-high vacancy rates: Major cities such as New York and San Francisco experience all-time high office vacancy rates, driving down office appraisal values and causing a negative outlook for the office sector, with potential repercussions for small and regional banks heavily invested in CRE.

• Bursting CRE bubble consequences: The collapse of the commercial real estate market could lead to low economic growth similar to the aftermath of the 2008 housing bubble burst, with interest rates remaining low for several years and the possibility of quantitative easing returning in 2024.

  Yahoo, ZeroHedge

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