Real-Estate Companies Are Turning in the Keys – What's That Mean for You?

by Andrew Zatlin June 13, 2023 3:30 pm ET

During the Great Recession, homeowners were so "underwater"...

They mailed in the keys to their homes and walked away.

Amazingly, commercial real-estate companies are doing the same thing today.

Is another crisis upon us?

For a transcript of this video, see below. This transcript has been lightly edited for length and clarity.

Real-Estate Companies Are Turning in the Keys – What's That Mean for You?

It's been about a month since legendary real-estate investor Sam Zell passed away.

If you aren't familiar with him, do a quick Google search to take a look at his accomplishments. He was brilliant.

In his final days, Zell was worried that commercial real estate ("CRE") was overpriced. And boy, was he right. In fact, the situation has gotten so out of hand, we're seeing glimpses of events that took place during the Great Recession.

Let me get you up to speed on what's been happening and give you some ideas on how to potentially profit from it.

A Repeat of '08?

Remember the dark days of 2008, when homeowners were so behind on their mortgages that they simply mailed their keys back to the banks and walked away? The same thing is happening today...

Except this time, it's in the commercial real-estate sector.

Park Hotels and Resorts (PK), owners of a Hilton and Park 55 hotel in San Francisco, announced it's defaulting on $750 million worth of debt obligations. The company owed at 4% and was about to refinance at 7%.

Couple that with dismal occupancy levels in the Bay Area, and Park decided to simply walk away. And now it expects to generate about $200 million more in profits over the next five years than if it had held on to these assets. (By the way, the company's stock jumped 2% following this move.)

You see, there's no downside to defaulting when you can't make the numbers work. And given that $1.5 trillion of commercial real-estate debt will need to be refinanced over the next two years – keep in mind, this debt will go from low interest rates to at least 7% – defaults are about to become much more common...

Especially considering a harsh truth...

Where Did Everybody Go?

Downtowns are drying up.

In other words, people aren't working in high-rise offices in big cities anymore. COVID put an abrupt end to that. And while there's been a bit of a recovery, occupancy rates for office space in some of America's biggest cities are still lacking. For example:

In Houston, office occupancy rates are 61%.
In New York, rates are 49%.
And in San Jose, they're 39%.

With no tenants to pay the rent and a need to refinance at higher interest rates, commercial real-estate owners are in serious trouble.

Even the Federal Reserve is starting to take notice. In a financial stability report last month, the Fed noted the following:

With CRE valuations remaining elevated... the magnitude of a correction in property valued could be sizeable and therefore could lead to create losses by holders of CRE debt.

Translation? Defaults are upon us!

Their Problem, Your Opportunity

Essentially, commercial real estate became vastly overpriced and overvalued. An asset class that was worth $2.2 trillion is now valued at about $1.5 trillion.

This is a recipe for disaster. But it's also an opportunity for investors like us.

A lot of mainstream investors will focus on the banks – those that have loans out to real-estate companies. Large banks are the least exposed to this problem, while smaller regional banks have the most exposure.

But that's where most investors will flock to. We're taking a different approach...

The Ripple Effect

You see, I like searching under the radar. That's where we'll find opportunities to secure significant profits.

When analyzing the demise of downtowns and commercial real estate, consider the ripple effect. If hardly anyone is working downtown, that's a major drop in business for sectors like hotels, parking garages, restaurants, and coffee shops.

Simply put, there are a lot of opportunities to make money from this crisis. Curious about my favorite opportunity?

Make sure you're a "Pro" subscriber, where I'll detail an investment with the potential for 300% returns.

We're in it to win it. Zatlin out.