The U.S. Federal Reserve warned of the growing risk of business bankruptcies and plunges in commercial real estate values in its semi-annual Monetary Policy Report, delivered to the U.S. Congress on 19 February.
“Business leverage now stands near historic highs,” the report noted. “Insolvency risks at small and medium-size firms, as well as at some large firms, remain considerable.”
Businesses of all sizes have piled on debt during the last 12 months, encouraged by the Fed’s record-low interest rates and investors chasing higher returns than government securities can offer.
Commercial real estate values in some areas have been near historic highs and “appear susceptible to sharp declines,” the report said, especially if the economic recovery slows or troubled companies desperate for cash dump their properties quickly for whatever prices they can get.
As we had forecast, commercial property owners are now squeezed between two trends.
As more shoppers migrate online from brick-and-mortar stores, the demand – and, therefore, rental rates – for retail space is declining; and the trend of companies sending white-collar workers to labor at home slashes the need for office space.
Also, at-home workers no longer need to live within daily commuting distance of their jobs, leading many to move farther away from urban centers where stores and other commercial properties are concentrated.
Increasingly, ex-commuters are shopping online.
The Fed also called for reforms to regulations governing investment funds that hold large amounts of public and private bonds. The funds saw hordes of investors take out their cash last March as the economy was shutting down, causing the Fed to step in with supports.
“Without structural reforms, the vulnerabilities demonstrated in March 2020 will persist and could significantly amplify future shocks,” the Fed’s report cautioned.
TREND FORECAST: We have been warning of a sharp commercial real estate down-trend and its financial implications since March of last year, and provided hard facts and data to support our forecast… which is now being made nearly a year later by the Feds!
As noted, under the New ABnormal, there will not be a strong rebound in return to commuting and working in cities large and small, and the trend of people leaving large cities for suburbs and ex-burbs will continue, thus putting further downward pressure on commercial real estate… and apartment rentals and home prices.
In addition, borrowing costs will rises as interest rates move higher, putting yet more pressure on deeply indebted commercial real estate owners and developers.
