Pimco, one of the world’s largest bond managers – currently managing $1.89 trillion in assets – reported on June 11 that more regional bank failures are in the cards following March 2023 regional banking crisis when Silicon Valley Bank, Silvergate Bank, and Signature Bank failed.
“The real wave of distress is just starting,” said John Murry, Pimco’s head of global private commercial real estate. “The combination of rising rates [on commercial mortgage loans] plus recessionary pressures creates real challenges for commercial real estate, from both a capital markets and fundamentals perspective.”
Commercial mortgage loans, which equal about $5.82 trillion in debt, are typically reset every five years to prevent the loans from ballooning out of control. Currently $2.8 trillion worth of loans are due to reset in the next five years. Specifically, $455 billion is resetting in 2024 and $533 billion is scheduled to reset in 2025.
With current interest rates on commercial property loans ranging between 6.92% and 7.42% for five-year contracts, up from 4% to 5% when the loans were originated in 2019, lending costs are set to soar for the borrowers.
At the same time, the $2.4 trillion office building sector is experiencing a sharp decline in property values.
As reported in The New York Times, several office buildings nationwide have recently sold at steep discounts of as much as 70%. For example, according to Bloomberg, Empire Capital Holdings and Namdar Realty Group bought the tower at 321W. 44th Street in midtown Manhattan for less than $50 million. That was 67% less than the $153 million that Related Fund Management paid for it in 2018.
With rapidly declining collateral and commercial loans resetting to higher rates over the next several years, commercial foreclosures are on the rise. The leading curator of land, property, and real estate data, ATTOM, reports that the industry saw 625 commercial foreclosures in March 2024 alone, marking a 117% increase since 2020.
Unfortunately, banks have the most exposure to these commercial loans.
Regional banks hold an estimated two-thirds of the total commercial loan amount. This means they’re sitting with billions in toxic loans and face substantial losses, which could lead to a new regional banking crisis. As of April this year,127 banks registered in California alone have property debts exceeding 300% of their value. And a finance professor at Florida Atlantic University’s College of Business, Rebel Cole, listed 66 banks in that state with debt-to-equity ratios of commercial real estate loans that also exceeded 300%.
In layman’s terms, this means these loans are 300% more than the bank’s total equity.
When you have downtown office towers selling for less than 10 cents on the dollar, you have the potential for major, systemwide chaos. Loan defaults rise and over extended banks collapse.
As investors, the big question concerning the troubling possibility of a new regional banking crisis is: How can we survive… and prosper?
2 ETFs to Buy to Survive and Prosper Through the Next Regional Banking Crisis
ETF No. 1: SPDR Gold Mini Shares (GLDM)
You can’t go wrong with a tried-and-true proven hedge against financial sector turmoil: the barbarous relic itself, gold.
Most people would consider it insane to leave their home uninsured. You buy insurance not to protect against a known loss – if you knew your house was at risk of burning down you would take immediate action to stop it! – but rather the great unknown. I view gold the same way.
Gold has been a store of value for 6,000 years and has survived every kind of financial calamity. Whatever happens in the banking sector due to a property meltdown, I don’t see gold’s 6,000-year run getting interrupted.
Personally, I prefer to own gold in physical form and to store it in a safe or safe deposit box. But if that’s not feasible for you, the next best thing is to get exposure via a gold-backed ETF like the SPDR Gold MiniShares (NYSEARCA:GLDM). This is a particularly good option for gold you want to hold in an IRA.
ETF No. 2: iShares Bitcoin Trust (IBIT)
The last collapse of the financial system in 2008 – and Western governments’ excessive bailouts to mitigate the fallout – spawned the invention of Bitcoin (BTC-USD).
Bitcoin’s genesis block – the very first block on the blockchain – had the words “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” embedded in it, and the meaning was clear. Not only was the text meant to mark a place in time… it was meant to send the message that Bitcoin was the antidote to a broken banking system administered by bankrupt governments.
There are plenty of ways to get access to Bitcoin today, but the easiest is simply to buy a Bitcoin ETF such as the iShares Bitcoin Trust (NASDAQ:IBIT). Just as GLDM is backed by gold, IBIT is backed by Bitcoin.
The 1 Stock to Watch
Watch List Stock: Boston Properties (BXP)
Note: Wait for the right time for this trade!
Finally, let’s not forget that property busts create incredible opportunities. Just last month, the tallest building in Fort Worth, Texas sold at auction for just $12.3 million. Three years earlier it was sold for $137.5 million.
Some shrewd investor just bought a landmark property for less than 10 cents on the dollar because they were liquid and able to pounce.
It’s still a little early to be jumping into the property market unless you happen to stumble onto an incredible deal like the Fort Worth tower. But get ready because that moment to back up the proverbial truck is likely coming soon.
One way to play an eventual bottom in office properties is via a large, liquid REIT like Boston Properties (NYSE:BXP). Boston Properties is one of the world’s largest office landlords.
But the key word here is “eventual.”
It’s too early to buy BXP just yet. I still see a lot of risk in the sector and I believe the real pain has yet to really start.
But keep this one on your watch list, as it could be attractive six to 12 months down the road as a play on a post-crash recovery.
On the date of publication, Charles Sizemore held a LONG position in BTC-USD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
