Last Friday, I took a few minutes to address my High-Yield Investing subscribers about an important topic that has become more and more worrisome the past few weeks.

I just couldn’t wait until the next issue to share it with them. And because it’s so important, I wanted to share it with you as well. So I sat down and filmed this quick video to share my thoughts. I hope you’ll take a couple of minutes and click play on the video below. You can also read a transcript of my comments below. If you like this video, please give us a like and a follow. And as always, if you have any questions or comments, drop me a line.

The first thing I saw this morning when I got to my office was a Fortune interview with Ross Perot Jr., warning about a potential collapse in the commercial real estate market. You probably remember his dad? The third-party Presidential candidate. Well, Junior is a billionaire real estate developer in Texas – and apparently, he doesn’t like what he sees right now.

He’s not alone.

These dire predictions have become almost a daily occurrence.

I saw similar comments recently from Elon Musk, who said that Commercial Real Estate is — quote — Melting. Down. Fast.

And then Charlie Munger (Warren Buffett’s longtime associate) said that he sees trouble on the horizon, too. Just yesterday, Jerome Powell, Chairman of the Federal Reserve, said that real estate losses pose a serious threat that is being carefully monitored.

Seems like everyone is weighing in on this — all the way up to the highest levels. These people aren’t attention seekers. And they aren’t doomsayers or short sellers. Unfortunately, I think their fears are justified.

Goldman Sachs actually referred to this environment as a perfect storm.

We all saw the collapse of a few big lenders back in March. It was an earthquake that rattled the banking system. Well, get ready for an aftershock. That may not even be the best metaphor because round two could be worse for most investors.

I honestly don’t know anyone who held stock in Silicon Valley Bank.

But real estate is a core sector of the market – particularly for dividend investors. Unfortunately, property empires are built on credit. And thanks to ten straight Fed rate hikes, the cost of carrying that debt has become a much heavier burden.

Stressed balance sheets aren’t the only problem. The pandemic may be over, but it brought about some structural changes that may be permanent. The most obvious is remote work arrangements, which have sapped demand for office space in many cities.

What Does This Mean?

I won’t bury you with statistics on absorption and vacancy and leasing rates. Just know that office tenants are currently trying to sublet more than 200 million square feet – basically, that’s unused space that they are trying to give away to somebody else. That figure has doubled since 2019.

Boston Properties (NYSE: BXP), which owns grade A office towers from Washington DC to Seattle, has lost more than half its value this year, plunging to around $50 per share – incidentally, the last time stock was this low was the financial crash of 2008/2009.

A slowdown in business travel has also hurt another REIT sector: lodging. Park Hotels (NYSE: PK) just stopped making payments on a $725 million loan tied to two of the biggest luxury hotels in San Francisco. It just walked away.

All of this circles back to the banks, which are facing a triple-whammy of asset impairment charges, rising loan loss provisions, and potential defaults. The value of many commercial properties has nosedived, and there is a $1.5 trillion dollar wall of mortgage debt set to mature by the end of 2025.

You can see why lending activity has tightened, making it tougher for borrowers to get project financing or to refinance existing loans.

Closing Thoughts

What does this mean for us? Well, it’s important to understand that while fundamentals in the office sector are weak, other groups like multi-family and industrial warehouses are still seeing robust demand. We have exposure to both of these in our High Yield Investing portfolio.

Also, there is quite a bit of variance from city to city. Dallas, for example, is doing fine. New York, not so much. That’s why I always stress the importance of geographical diversification.

I’m re-assessing all of our real estate holdings, as well as Bank OZK, whose loan book is skewed more to commercial than retail. But I think most are prepared to weather this storm.

Am I sounding the alarm and saying that this situation needs to be monitored? Yes. Am I panicking? No. I’ll have more to say on this in the next issue of High-Yield Investing.

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