When building a well-diversified portfolio, you can find it beneficial to keep an ear to the ground and an eye on financial headlines. Knowing what may be coming our way—good, bad, or indifferent—creates opportunities for us to reexamine our asset mix and make any adjustments that could support a healthier financial outlook and, perhaps more important, provide us with additional peace of mind.
For example: In last week’s edition of “Gold News & Views,” U.S. Money Reserve President and former Director of the U.S. Mint Philip N. Diehl mentioned real estate markets and how many analysts believe they are highly vulnerable. This topic has been making headlines for some time—on June 23, 2023, for example, Bloomberg released an article titled “The World’s Empty Office Buildings Have Become a Debt Time Bomb.” But as time has passed, the situation surrounding commercial real estate—and its potential implications for our economy—has moved closer to center stage.
Multiple analysts are flashing warning signs for the commercial real estate market.
On July 22, 2023, Fortune published an article referring to a “slow-motion crisis” happening in the commercial real estate market. The article goes on to share segments of a podcast in which John Fish, former Federal Reserve Bank of Boston chairman of the board and current chair of the Real Estate Roundtable think tank, shares his thoughts on this potential crisis.
“When you talk about these large structures, especially in New York City, you get all these buildings out there, almost a hundred million square feet of vacant office spaces. It’s staggering,” Fish said. “And all of a sudden, the cost of capital to support those buildings has almost doubled. So you’ve got a double whammy.”
Meanwhile, on July 24, 2023, MarketWatch published an article describing a “$1 trillion ‘wall of worry’ for commercial real estate that spirals through 2027.” The term “wall of worry” comes from Brian Lane, lead analyst for private credit at the Wells Fargo Investment Institute, and refers to the “wave of commercial real-estate loans come due through the end of 2024,” though the article notes that “the balance balloons to about $2.5 trillion through the end of 2027.”
Lane points to the “higher vacancy, reduced net operating income, falling prices, and rising capitalization rates” being faced by property owners, many of whom Lane says will likely resort to private capital providers for loans rather than banks. But what happens when that new debt comes due?
A disruption in the commercial real estate market could have wider economic implications.
How might a major shift in the commercial real estate market impact everyday Americans? Fish points to tax revenues as being an important link. “70% of all revenue in cities in America today come from real estate,” Fish said. A wave of foreclosures in the commercial real estate sector, Fish says, would then lead to lower tax revenues, which could affect public servants. “What happens is you talk about fireman, policemen, and teachers in Main Street, USA, and at the end of the day, we’ve never gone through something as tumultuous as this,” Fish said.
There is, however, “light at the end of the tunnel,” according to Fish. He notes that the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and others in the federal government have issued policy guidance to the commercial real estate industry. And in the MarketWatch article mentioned above, Saira Malik, chief investment officer at Nuveen, notes that the current delinquency rate of around 2% on loans in bond deals is far below the rates experienced during the global financial crisis 15 years ago, when the rate eventually reached 9%.
Once again, we’re faced with some amount of uncertainty. This feels like it could become a major market disruptor, but no one can say for certain what the future holds. But if you’re like me, that uncertainty equals opportunity.
A well-diversified portfolio can bring peace of mind in times of uncertainty.
At its core, portfolio diversification is all about protecting yourself, your retirement, and your loved ones from whatever lies ahead. And it’s different for everyone—depending on how far you are from retirement or your general level of comfort with financial risk, your portfolio may look completely different from someone else’s, even if they’re in a similar place financially.
When I learn about new—and potentially major—market factors like the current status of the commercial real estate market, I like to use that knowledge to look for actions I can take to help shore up or even grow my portfolio. Do I need to keep a closer eye on banking news in case commercial real estate foreclosures rise, possibly signaling a larger market disruption? Would now be a good time to take a larger position in assets like physical gold, which have historically been seen as hedges against this sort of market uncertainty? If you’re like me, these may be questions worth considering.
