Why Commercial Real Estate Will Be Central To The Next Credit Bust

On Sunday, macro strategist Lawrence McDonald made three tweets about US corporate real estate I think merit highlighting. They show a corporate real estate market that has been white hot during this particular US business cycle. And that means it is one of the credit sectors to watch for signs of distress.

Here’s what he tweeted (newsletter readers hit the date link below because it displays all three tweets):

U.S. Commercial Real Estate

– +80% from the 2009 lows
– Loans in Banking System: $2.1T
– Securitization CMBS: $1.2T

(2)

— Lawrence McDonald (@Convertbond) June 11, 2017

Commercial real estate is near its pre-recession peak in terms of value as a percentage of GDP. And that level will soon be broken given the huge slug of projects now in the works.

This is an interest-sensitive business because a lot of it is done using leverage in order to multiply profits. And this makes commercial real estate vulnerable to the Fed’s present rate hike cycle.

Bottom Line: Commercial real estate is a sector that continues to do well and power the US economy forward. But there are signs of overbuilding in the absolute number of units coming online right now, particularly in residential property. This makes the commercial property market vulnerable, and we should pay attention to signs of weakness in the sector.