{"id":1255482,"date":"2023-04-24T10:10:43","date_gmt":"2023-04-24T14:10:43","guid":{"rendered":"https:\/\/bugaluu.com\/news\/what-brookfields-default-has-to-do-with-you\/1255482\/"},"modified":"2023-04-24T10:10:43","modified_gmt":"2023-04-24T14:10:43","slug":"what-brookfields-default-has-to-do-with-you","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/what-brookfields-default-has-to-do-with-you\/1255482\/","title":{"rendered":"What Brookfield’s Default Has To Do With You"},"content":{"rendered":"
\"\"<\/a><\/div>\n

What Brookfield’s Default Has To Do With You<\/span><\/p>\n

\n

Authored by MN Gordon via EconomicPrism.com,<\/em><\/a><\/p>\n

Over more than two decades we worked off and on in Downtown Los Angeles.<\/strong>\u00a0 We had a client for several years at 555 West 5th Street, in the tower at the base of Bunker Hill.\u00a0 We\u2019d meet several times a week.\u00a0 Always in the morning.<\/p>\n

Sometimes he would boast about his property in Coeur d\u2019Alene, Idaho, and how he\u2019d one day leave LA.\u00a0 Other times he\u2019d deliver us a wire brushing for events beyond our control.\u00a0 One time he accused us of \u2018smash and grab\u2019 tactics for merely requesting payment of a past due invoice for contracted work that had already been delivered.<\/p>\n

After these inspiring encounters we\u2019d hike by the collection of derelicts and dope smokers sprawled out on the wall in front of the Central Library.<\/strong>\u00a0 This was as we made our way back to our office at the Wedbush Center on Wilshire Boulevard near Figueroa Street.<\/p>\n

On the corner in front of the 7-Eleven a clown appeared one day.\u00a0 He had oversized shoes, a rainbow wig, face paint \u2013 the whole costume.\u00a0 All day every day, rain or shine, he was there, jumping around, waving at cars and buses, and fist bumping people walking by.\u00a0 Then, after about nine months, he was gone. \u00a0We never saw or heard of him again.<\/p>\n

One spring day in 2016, amongst a mob of pedestrians, we gazed up at the skeleton frame of what would become the Wilshire Grand Center.\u00a0 For the first time in several years the buzz and hum of diligent building activity was eerily silent.\u00a0 Construction efforts had been shut down for the day.<\/p>\n

Sadly, less than 24 hours earlier a distraught electrician had taken a swan dive off the 53rd floor.\u00a0 <\/strong>The man\u2019s death prompted an immediate work stoppage and evacuation of the tower.<\/p>\n

\n

\u201cIt sounded like a bag of cement fell off the edge of the building,\u201d<\/em>\u00a0remarked<\/a>\u00a0one observer.<\/p>\n<\/blockquote>\n

Naturally, the sound of impact was far too grim for us to contemplate.\u00a0 We didn\u2019t have much of an appetite that day.<\/p>\n

But out of habit, we stopped at the food court \u2013 FIGat7th \u2013 and ate something called a moon bowl.\u00a0 There, in the shadow of the tower at 777 South Figueroa Street, we wondered how time must have simultaneously slowed down and sped up for the jumper as he descended toward the ground.<\/strong><\/p>\n<\/p>\n

Brookfield Defaults Again<\/strong><\/h2>\n

This trip down memory lane was wandered with intent and purpose.\u00a0 Because this week Bloomberg\u00a0reported<\/a>\u00a0that Brookfield Corporation, one of the largest commercial real estate companies in the world, has defaulted on $161.4 million of office building mortgages.<\/strong><\/p>\n

These office buildings are mostly in Washington, DC.\u00a0 However, this Brookfield default comes just two months after its much larger default of $784 million in mortgages for two office towers in Los Angeles.<\/strong>\u00a0 These include our old haunts at 555 West 5th Street and 777 South Figueroa Street.<\/p>\n

The reasons behind the defaults are generally straightforward.\u00a0<\/p>\n

The double whammy of higher vacancy rates post-Covid and higher interest rates have turned these buildings from profit generating ventures into huge gaping money pits.<\/strong> \u00a0<\/p>\n

Here are the grim particulars from Bloomberg:<\/p>\n

\n

\u201cIn the Washington metro area, office property values have plunged 36 percent through March from a year earlier, on par with declines nationwide, according to the Green Street index.\u00a0<\/em><\/p>\n

\u201cAmong the dozen buildings in the Brookfield portfolio with the $161.4 million debt, occupancy rates averaged 52 percent in 2022, down from 79 percent in 2018 when the debt was underwritten, according to the report. \u00a0Monthly payments on the mortgage\u2019s floating-rate debt jumped to about $880,000 in April from just over $300,000 a year earlier as the Federal Reserve raised interest rates.\u201d<\/em><\/p>\n<\/blockquote>\n

In short, as rental income declined due to higher vacancy rates and monthly mortgage payments jumped over 190 percent, throwing good money after bad became untenable for Brookfield.\u00a0<\/strong> Default was the better option.<\/p>\n

Fake Insurance<\/strong><\/h2>\n

The fact is there\u2019s simply too much unused office space.\u00a0 This is not a situation that will magically change.<\/strong><\/p>\n

Maybe a savvy developer will come in and complete an office-to-residential conversion.\u00a0 But that\u2019s not Brookfield\u2019s game.\u00a0 And whoever does it will only take the risk at a much lower price and with much better terms.<\/p>\n

In the meantime, who loses?<\/strong><\/p>\n

According to Federal Reserve data, and as noted by\u00a0Fortune<\/a>, 67 percent of all commercial real estate loans are held by small banks and regional banks.<\/strong>\u00a0 Consequently, more debt defaults in the commercial real estate market could lead to more small and regional bank blowups.<\/p>\n

If you have deposits under $250,000 in a bank that goes bust, you are protected by the Federal Deposit Insurance Corporation (FDIC).\u00a0 But how safe is your money, really?<\/p>\n

At the end of 2022, the FDIC\u00a0reported<\/a>\u00a0its Deposit Insurance Fund had a balance of $128 billion.\u00a0 This comes to a reserve ratio of 1.27 percent of the total insured deposits.<\/strong><\/p>\n

By our estimation, insurance reserves of 1.27 percent of potential obligations are not real insurance.\u00a0 Rather, these reserves are fake insurance that pays for an extremely fragile trust which says,\u00a0\u2018if you don\u2019t pull your deposits, I won\u2019t pull mine.\u2019<\/em><\/p>\n

In a real panic, FDIC reserves would be vaporized in less than a day.<\/strong><\/p>\n

Presumably, some of these bad mortgages have been packaged up in tranches as collateralized loan obligations (CLOs) and sold to pension funds and other investors.\u00a0 Could this be the initial alarm bell of a financial crisis akin to the mortgage-backed securities (MBS) crisis of 2007-09?<\/p>\n

If the\u00a0report<\/a>\u00a0from the $306 billion California State Teachers\u2019 Retirement System (CalSTRS) is any indication, then the answer is a definitive yes.\u00a0 Specifically, this week it was revealed that CalSTRS is preparing to write down the value of its $52 billion commercial real estate portfolio.<\/strong><\/p>\n

From what we can tell, these bad investments were not made via CLOs.<\/strong>\u00a0 Nonetheless, you can already smell the rot buried in commercial real estate CLOs. \u00a0We\u2019ll have to do some more digging to unearth the decay.<\/p>\n

What Brookfield\u2019s Default Has to Do with You<\/strong><\/h2>\n

Today, however, there\u2019s a more important question to answer.\u00a0 What does Brookfield\u2019s default on these commercial properties have to do with you?<\/p>\n

You may not yet realize it.\u00a0 But these defaults have everything to do with several unfavorable factors that are currently working against you.\u00a0 These include elevated consumer price inflation and relatively higher financing costs.\u00a0 And here\u2019s how they\u2019re making your life less agreeable\u2026<\/strong><\/p>\n

The two most common purchases by the average person that require financing are for automobiles and houses.\u00a0 Relatively higher interest rates make the debt payments on these purchases incredibly burdensome.<\/p>\n

Consider automobiles, for instance.\u00a0 According to the\u00a0Washington Post<\/a>:<\/p>\n

\n

\u201cThe average interest rate for a new vehicle was 7 percent in the first quarter, compared with 4.4 percent a year earlier. That\u2019s the highest level since 2008, according to new data from Edmunds, a car shopping website. For used vehicles, the average jumped from 7.8 percent to 11.1 percent.\u201d<\/em><\/p>\n<\/blockquote>\n

This is why the monthly payment for roughly 17 percent \u2013 or about 1 in 6 \u2013 of new vehicle loans in Q1 2023 was over $1,000 bucks.<\/p>\n

At that price it really doesn\u2019t matter what your income level is.\u00a0<\/strong><\/p>\n

One thousand dollars a month for a car payment is a significant pile of money.\u00a0 So, too, is $730 per month, which was the average monthly payment for a new vehicle in the first quarter.<\/p>\n

In all seriousness, do not sign up for one of these monster car payments.\u00a0 This will ruin your life for decades to come.\u00a0<\/strong> Sooner or later, something must give in the way of lower car prices.\u00a0 Don\u2019t lock yourself in to this misery.<\/p>\n

Not only does a monster car payment cut into people\u2019s monthly budgets.\u00a0 It also limits their ability to save and invest for the future.\u00a0 And if people aren\u2019t saving and investing for the future, they\u2019re not building wealth.\u00a0 To the contrary, like Brookfield, they\u2019re burning wealth.<\/p>\n

To this end, we have a hunch that over the next couple of years vast numbers of people are going to experience the rush that comes when time simultaneously slows down and speeds up.<\/strong><\/p>\n

Not because they\u2019ve committed a base jump off a skyscraper \u2013 though some will.\u00a0<\/p>\n

Rather, it\u2019ll occur at the precise moment they come to the disturbing realization that they\u2019re broker than broke.<\/strong><\/p>\n

*\u00a0 *\u00a0 *<\/p>\n

Like this article?\u00a0 If so, please\u00a0Subscribe to the Economic Prism<\/a>.<\/em><\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nMon, 04\/24\/2023 – 12:25<\/span><\/p>\n

From:Zerohedge<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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