What Does A Surge In Office Vacancies Have To Do With Residential Real Estate?

What Does a Surge in Office Vacancies Have to do with Residential Real Estate?

The U.S. real estate market is experiencing more pain and bringing on a new wave of loan defaults. We're talking about a complete massacre spreading throughout the entire commercial sector, most heavily impacting office buildings. And guess what? This credit event has now caused a lack of liquidity in banks and is already spilling over to residential mortgages. Yikes! 

Of the more than 5 trillion dollars (yes that's Trillion with a "T"!) of outstanding commercial and multi-family mortgages in the U.S., the office segment is the most vulnerable of all commercial real estate.

The current office occupancy level sits at just under 50 percent:


This means that it's harder and harder for the owners of office buildings to pay their mortgages. 

Most commercial loans are designed to be shorter term, so they're typically at a fixed rate for a couple years before going adjustable. Many owners of office buildings took advantage of the low rates from a few years ago and locked in a great rate then.... but these are starting to go adjustable (which means they'll increase if the current rate is higher..... which it is..... by a lot)


So as these owners' rates increase it'll be harder and harder for them to cover the note, especially since the whole "come back to the office.... please!" marketing hasn't worked

So with less rental income coming in and rates getting higher we're likely about to see a whole lotta defaults a'comin.

So how does this tie into residential real estate? Glad you asked! So a majority of all office loans are held by smaller regional banks. More than 62%:


Flipping over for a moment to residential mortgages, guess who holds a massive amount of those loans? That's right, smaller regional banks hold a whopping 45% of all residential mortgages right now.

These banks are the ones at the greatest risk of going under should there be more bank runs like the SVB one that happened recently. So they're tightening on lending more on residential mortgage loans.

In fact, the credit markets are the tightest they've been in 15 years, since the fallout of the 2008 crash. And we're just getting started!

So these small banks have to fade bank runs, office mortgage defaults, and residential mortgage defaults all the while being hamstrung on loaning money which is how they actually make money!


if you'd like to take a deeper dive into what's going on with the banks, this video by EPB Research is the best I've seen

gang I've been touting it for months now, things are about to get rough. the one thing that might be saving the residential real estate market is that so many people don't want to give up their super low interest rate mortgages, and as long as they stay gainfully employed they'll be holding onto their houses which will keep inventory down.

As long as that happens, we may only see a moderate decrease in prices in the short term. But as soon the dam breaks on the shadow inventory of foreclosures...... 


that's it for this week folks! I hope you found this info helpful! please consider sending me your feedback so I can continue to improve the content I'm sending ya!
Real Estate in the News
-EPB Research
With Mortgage Rates in Flux, Is ‘Buy Now, Refinance Later’ Good Advice?
-National Association of Realtors
-Keeping Current Matters

Current mortgage interest rates

rates as of 3/31/23

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#1 By Josh Gartenbaum at 4/3/2023 10:46 PM

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