The Market Still Doubts Fed’s Inflation Resolve
Jerome Powell, FED Chairman, has not convinced Wall Street he is serious about winning the battle.
The market continues to doubt the Federal Reserve's commitment to controlling inflation, despite the Fed's revised interest rate estimates from 5.1 percent to 5.6 percent by year's end. The market's skepticism is also reflected in the Bloomberg consensus forecast, which shows rates remaining where they currently are by the end of the year. This skepticism persists despite the Fed's demonstrated commitment to fighting inflation, as shown by its consistent rate hikes, even in the face of potential recession.
Commercial Real Estate Tsunami: The “Black Swan”?
A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.
Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.
A "Black Swan" event is a term used to describe an unpredictable event that has a major impact on society, or the economy. The term was popularized by Nassim Nicholas Taleb in his book "The Black Swan: The Impact of the Highly Improbable."
These events are rare, difficult to predict, and have a significant impact on financial markets, businesses, and individuals. Examples of Black Swan events include the 9/11 terrorist attacks, the 2008 financial crisis, and the COVID-19 pandemic.
You wouldn't anticipate Elon Musk to be at the top of the list of property owners putting a stop to Goldman Sachs' commercial loans, especially given Tesla's close association with Goldman.
But it seems that business is business.
Elon Musk's unwillingness to pay the rent at Twitter was one of Goldman's "surge" in commercial real estate loan delinquencies in the first quarter, the FT reported this week.
According to data submitted by Goldman's licensed banking business, the value of loans to CRE borrowers who were delinquent on their payments increased by an astounding 612% in the first quarter, to $840 million.
Since the demise of Covid, the commercial real estate market has been a powder keg ready to explode. When portfolio/property marks are updated in the second half of this year, analysts expect that a cascade of selling and deleveraging in the currently barren commercial office space business may be in store.
In addition to Goldman, other banks are also signaling potential losses on certain loans, with Goldman reportedly having "significantly less exposure" to Commercial Real Estate (CRE) than its larger competitors, as noted by the Financial Times. Goldman's outstanding loans backed by CRE total $8.4 billion, while competitors like Wells Fargo and Bank of America have $91 billion and $60 billion respectively.
Twitter halted its rent payments in November, according to the report, and CEO Elon Musk has stated he has no plans to resume these payments. These payments would be directed to Columbia Property, a Real Estate Investment Trust (REIT) to which Goldman, along with Deutsche Bank, has lent $1.7 billion.
Christopher Kotowski, a banking analyst at Oppenheimer, minimized Goldman's exposure to the Financial Times, stating, “For Goldman, lending isn't of significant importance.”
However, the report indicates that over 10% of Goldman's CRE loans, which make up 90% of the total loans in its banking subsidiary, are experiencing some form of delinquency.
“In 2020, we expressed our commitment to the banking model. We believe it will be a crucial driver of the firm's future growth,” Goldman previously stated. The firm's outstanding bank loans have now surged to $1880 billion, a dramatic increase from the mere $3 billion a decade ago.
This year, Goldman has announced its intentions to retreat from its consumer business, Marcus. The total delinquent loans of the firm amount to $3.2 billion, approximately 2% of its outstanding loans, concludes the Financial Times.
Is This Just the Beginning?
There will surely be a large number more defaults when merchants and businesses depart the central business districts of our major cities.
Before the epidemic, office occupancy in New York City was very close to 100%.
At this time, it is roughly 50%.
Of course, the crisis we are currently experiencing is not limited to the commercial real estate market.
Sales have been declining nationwide for months as the residential real estate bubble has also begun to pop.
Higher interest rates will continue to put downward pressure on home prices, and many analysts are extremely concerned that foreclosure filings have begun to surge, May foreclosure-related filings, which include default notices, scheduled auctions and bank repossessions, were up 7% from April and up 14% from a year ago, to 35,196 properties, according to the real estate data group ATTOM.
But for the time being, a staggering number of Americans continue to believe people who promise them that better times are ahead, so they are making no preparations for the massive storm that is drawing near.
There Will Be Happy Days
But only after the much needed economic corrections take place.
