Real Estate Meltdown Brings New Opportunity

Mike Leslie
July 1, 2024

Office space falls while electricity prices soar.

Inputs that matter: Veteran strategist Chris Vermeulen of The Technical Traders believes he is witnessing troubling signals in the market, noting that borrowing costs are expected to remain high for an extended period.

  • Vermeulen notes that building numbers for single—and multi-family homes have plateaued following a sharp decline last year, mirroring patterns last seen before the devastating 2008 housing crisis.
  • While most single-family homes in the U.S. are financed with 30-year fixed mortgages, higher rates could create challenges when refinancing, especially for commercial property owners facing $900 billion of maturing debt this year.

The opportunity: Despite a recent stabilization in building activity driven by increased investment, Vermeulen believes the real estate market is still at risk, particularly if mortgage rates remain high.

  • "This is a sign that things are breaking down, and this is just a bounce," Vermeulen said to Business Insider.
  • "It's the last spot where you can squeeze some profits out of these buildings. Material and labor costs are up, and we see the financial sector and real-estate pricing really fall apart."
  • Meanwhile, much of the stock market's recent success is due to the U.S. Dollar (USD).

Zoom in: Such pressure could lead to an increased number of commercial real estate foreclosures, which are already up 117% year-on-year in the first quarter, according to ATTOM data, a leading provider of nationwide property information.

  • For example, the Dallas Business Journal reported that Pinnacle Bank Texas recently bought back the 40-story Burnett Plaza, Fort Worth's tallest building, at a foreclosure auction for $12.3 million, just $12.30 per square foot and less than 1 percent of its previous sale price.
  • The previous owner, a New York-based Opal Holdings affiliate, defaulted on a $13 million loan from Pinnacle, triggering foreclosure proceedings.
  • The Opal affiliate bought the one-million-square-foot Burnett Plaza at 801 Cherry Street for $137.5 million in 2021.

Between the lines: Kermit Baker, chief economist with the American Institute of Architects, said there is concern that the commercial sector may be in for a broader "meltdown."

  • On the real estate front, what is happening in the office market is not unlike what has been going on with regional malls over the past seven to eight years, according to Richard Barkham, global chief economist for Dallas-based brokerage CBRE.

Follow the money: Employers are downsizing their leased footprints, opting for less square footage or shorter leases.

  • Much of this is due to the U.S. electricity price being at an all-time high, following an upward trend that began in October 2020.
  • The other reasons include more time outside of the office for many employees.
  • However, mixed-use commercial real estate and restaurant space is booming.

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