According to the Dallas hedge fund manager who correctly predicted the subprime crisis, the collapse of regional banking is far from over. The commercial real estate sector is also facing a difficult reckoning as demand for office buildings isn't returning.
In recent interviews, J. Kyle Bass said that the U.S. Federal Reserve was responsible for the chaos in banking and the fading economy. It did this by pumping money into the system and keeping interest rates low. Then, when inflation soared it overreacted and raised rates too quickly and too far.
Bass stated in an interview with CNBC Tuesday, just before the Fed announced its most recent rate decision today, that 'unfortunately, the Fed itself has been the bull'.
Today, the Federal Reserve approved its 10th rate hike in just over a calendar year. The Fed Funds Rate is now at a range of 5% - 5.25%, the highest level since August 2007. The quarter-point increase in interest rates today was widely expected.
Bass, in an interview on Tuesday night, said that higher rates had compounded the problems of the banking system. This includes the recent high profile bank failures.
He said that there would be "many more failures of banks," with the focus on those who have heavily lent on office buildings.
Bass stated that 'we all know the office market is in a state of collapse and has been forever changed'. There is about $2 trillion in equity in the U.S. Banking System today. I believe you will see $225 billion in losses due to the office. This is a 10% loss to the banking sector.
Bass stated in an interview with CNBC that 'it won't put the banking system to the point of bankruptcy, as it did in 2008'. It's not equally distributed. There will be more bank failures - those with high concentrations of offices.
Bass, who became famous more than a ten years ago for betting against subprime loans before the U.S. Housing Market collapse, now calls for office buildings to be demolished in cities throughout America.
Bass says that the glut of office space in the United States is driving down the leasing rates. This phenomenon has been sweeping the nation, and it's unlikely to reverse itself anytime soon. Bass says it's not feasible to convert most office towers to apartments or condos due the cost of re-plumbing, renovating and other overhauls.
Bass's less than rosy view of the U.S. Office Market is not unique.
According to a report released by JLL Inc., the office vacancy rate increased to 20,2% in the U.S. in the first three months, from 19,6% in the final quarter of 2022.
Bob Sulentic, President and CEO of Dallas based CBRE Group Inc., (NYSE: CBRE), spoke to analysts during a earnings call last Thursday.
Sulentic stated during the conference call that he estimates it will take twice as long for this asset class to recover its lost value compared to the time it took after the global financial crises. This reflects the enormous challenges that office assets face, driven both by the slow return of employees to the office and the loss of jobs in the tech and other sectors.
Bass has a long history of criticizing the Fed over bank meltdowns including the collapses of Silicon Valley Bank, Signature Bank and other banks.
Bass stated in an interview with Fox Business News on The Claman Countdown, March 13, that the Fed's Balance Sheet was just $4.1 trillion before COVID. They grew it to just over $9 trillion in only 13 months. We've never produced that much money before in our history.
Bass stated that the Fed is the only institution in the entire world tasked with controlling inflation. Bass said that the Fed is the only institution in the entire world capable of creating inflation. In this case, the Fed overdid things on the rise and are now recklessly overdoing the rate hikes on the decline.