Big trouble is ahead for many banks that have commercial real estate in their portfolios. Federal Reserve Chair Jerome Powell warning, “there will be bank failures” at the Senate Banking Committee in early March.
Due to declining values and defaulting loans in the commercial real estate space, smaller banks are feeling the pinch. Specifically, small and midsize banks could collapse in the coming months. On today’s show, we’re going to discuss this issue and what it means for you.
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It’s no secret that the commercial real estate sector has seen huge impacts since the pandemic. The work-from-home revolution has brought about sweeping changes for society and the economy at large. Office spaces and retail locations specifically have been hit hard with vacancies over the past few years, and there’s no sign of things trending in a positive direction. You don’t have to be an economist to see that things have gone south. If you’ve been in any downtown area or shopping mall in the past couple years, it’s blatantly clear that there’s been a shift in commercial real estate.
In fact, Moody’s Analytics found that a staggering 19.6% of office spaces were not leased in the fourth quarter of 2023, up from 18.8% in 2022.
This major shift in the workplace has totally upended the commercial office space industry. This combined with higher interest rates has put pressure on leaseholders and lenders alike, resulting in many businesses defaulting on loans. Nearly $1.5 trillion of US commercial real estate will be due for repayment by the end of 2025. And with interest rates being a bit higher, refinancing is risky.
Big name banks like Chase and Wells Fargo will walk away from the fallout largely unaffected. In fact, they may even profit by having a larger monopoly in the banking industry going forward. But what about community banks and regional banks without much capital to fall back on? The future is bleak.
Small local banks with a high percentage of commercial properties on their balance sheets WILL fail. That’s exactly what Jerome Powell said. There will be defaults and collapses in community banks; we heard it straight from the horse’s mouth. You don’t have to read between the lines. There’s big trouble here. Federal Reserve data from September 2023 showed that commercial real estate comprised 44% of portfolios at small banks, vs. only 14% of the country’s 25 big banks.
This situation could have serious consequences on a widespread scale. If you have money sitting in small local or regional banks, start thinking about ways to protect your money. There’s no longer any uncertainty about how work from home practices and the changing economy will impact office spaces. We’re seeing it unfold right in front of us, things are crashing.
Now more than ever, it’s important to protect yourself and your family’s future. Let me give you some specifics:
If you have large amounts of cash sitting in bank accounts, consider how you can diversify that money. That itself could be an entire other video, but off the top of my head you could buy gold, real estate notes, rental properties, invest in retirement accounts.
You might have been taught that the bank is the safest place to keep your money, but clearly that’s not always the case. After the collapse of Silicon Valley Bank in 2023, the idea of bank failures is not just a conspiracy theory—it’s a very real possibility in this economy.
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