For several weeks Elon Musk has been joining the voices of Cassandra, who foresee a real estate bubble bursting.
He regularly alerts that the situation in the sector is deteriorating.
For now, it’s commercial real estate that’s holding the attention of doomsayers. And the reason is simple: Commercial real estate relies on the health of banks and their ability to finance projects.
Since March, not all has been well in the financial system, and more particularly with regard to the U.S. regional banks, which finance the major real estate projects.
Since Silicon Valley Bank collapsed on March 10, a crisis of confidence in banks has rocked investors. The question at the heart of this crisis is whether the California bank’s troubles resulted from a brewing financial crisis, the effects of which might continue to be felt.
This concern is due not to unfounded panic by investors, which has happened. It is fear rooted in the fact that Silicon Valley Bank (SIVB) – Get Free Report was the go-to institution for startups and many small businesses.
The bank did not take excessive risks — until the Federal Reserve began to increase its benchmark interest rate and the bank’s bet on rates via its acquisitions of treasury bonds and municipal bonds turned sour. SVB then found itself with huge unrealized losses.
Is Real Estate in Big Trouble?
Many experts and investors are convinced that other regional banks have made similar bets and also are sitting on unrealized losses. Many regional banks, said Ryan Nash, managing director of financials-group research at Goldman Sachs, have “exposure to high-risk commercial real estate areas, such as offices.”
Because property values have declined as office vacancies have increased in many cities across the U.S., many banks are expected to encounter challenges with their commercial real estate portfolios.
Source: www.thestreet.com
