The Next Financial Implosion Is Not Going To Be About The Banks!

Long-term store closing plans have already been announced by a slew of major brick and mortar retailers, including The Gap (NYSE:GPS), Barnes & Noble (NYSE:BKS), Office Depot (NASDAQ:ODP), Walgreens (NASDAQ:WBA), American Eagle Outfitters (NYSE:AEO), and Aeropostale (OTCPK:ARO). Furthermore, Wal-Mart's (NYSE:WMT) plans include closing 154 US stores, while they currently operate 4,627 US stores as of June 30, 2016. Kohl's (NYSE:KSS) has closed 18 locations with Macy's (NYSE:M) shuttering another 40. The chart below shows an idea of the sheer amount of closures occurring in recent years, as well as the upcoming.

 

TSUNAMI OF PROBLEMS ON THE HORIZON

Despite all the current market euphoria based on the Trump administration's promises of "dramatically" reduced taxes, fiscal spending and massive regulatory reduction - the stark reality is still:

 

The US Credit Cycle shows clear signs of having turned,

  • The US Business Cycle is mature and in the Final Stage for this cycle,

  • There is a strong chance of a US Recession in late 2017 or 2018 which is historically long overdue,

  • There is a Coming "Property Tax Wave" based on city and local fiscal requirements,

  • Interest Rates Rising,

    • Part of what’s been driving the recovery in property investment sales, in addition to improving fundamentals, has been the availability of cheap debt, as the Federal Reserve has kept interest rates at historically low levels. But the era of cheap money can’t last forever and if interest rates begin to climb up, especially if they shoot up quickly and unexpectedly, that can put a damper on investors’ interest in commercial real estate assets.
  • 10-Year Loans Coming Due,

    • The industry will also be facing a timing issue as approximately $188 billion in commercial mortgage loans reach maturity between 2015 and 2017. Researchers at ratings firm Fitch estimate that unless interest rates rise at a quicker-than-expected pace, borrowers on most of those loans will be able to refinance. But in some cases, especially with under-performing assets or assets in tertiary markets, borrowers may be forced to come up with extra equity to cover valuation gaps.

CMBS Underwriting Deteriorating,

  • After several years of minimal CMBS issuance, everyone is happy to see conduit lenders back in the market. But with the competition heating up between banks, life insurers and conduit shops to lend money to real estate borrowers, underwriting standards have started to loosen. A little of that dynamic may be healthy, but if underwriting quality deteriorates more and more the industry may find itself back where it started, in 2007/2008. After all, this is a cyclical business.
  • TRIA Extension,

    • The Terrorism Risk Insurance Act (TRIA), which was signed into law following the destruction of the World Trade Center on September 11, is set to expire at the end of this year. If it’s not extended it will force property owners to seek terrorism insurance in the private market, where insurance companies have not been especially keen to agree to cover losses for events that are truly unforeseeable and that can result in billions of dollars’ worth of damage.

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Disclosure: Information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, ...

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