The “Big Short 3” Has Its Best Day Yet

Last Thursday, in that ancient past when Silicon Valley Bank and Signature Bank were still solvent, we (correctly) warned that a new “credit event” had emerged – namely the collapse of the small and regional banking sector (not even we expected how fast things would move in the nex few days) and also said that after MBS and resis, and malls, a new “Big Short 3.0” trade had re-emerged:

“Yes: the Big Short 3.0 is all about shorting offices…. and with good reason: office property values have plunged 25% in the past 12 months, according to Green Street, and higher interest rates will only add to the pain. Ultimately, the decline in office prices is likely to outpace the drop for commercial real estate prices broadly.”

We won’t regurgitate the whole post (please read it here), suffice it to say that since last Thursday, the office trade has absolutely imploded, reaping material profits for those who put the short on.

As BBG notes, office real estate investment trusts like Vornado Realty Trust, SL Green Realty Corp. and Hudson Pacific Properties Inc. are falling Friday as investors ditch real estate stocks amid a broad market selloff. Office giants, VNO, SLG and HPP all slumped at least 7% Friday…

… while the S&P Composite 1500 Office REITs Index drops as much as 5.1%. REITs are also falling more broadly, with the S&P Composite 1500 Real Estate Index down as much as 2%. Meanwhile, a gauge of homebuilders fell as much as 1.3%.

In conclusion we will just paraphrase what we said last Thursday because it is more relevant now then it was even back then:

In conclusion, even without the office real estate crisis, small banks were already headed for an unsettling mix of reduced funding and more underperforming loans. Throw in a cascade of bad debt in exposure to office real estate and you could see a repeat of the 2009 banking crisis for the small banks… if only in the beginning, because once the small banks go down, the big banks won’t be far behind.

The only thing we would add is that be careful if/when the Fed capitulates. An emergency rate cut by the Fed over the weekend/Monday morning and this sector will explode higher.