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American Offices Are Being Sold at Discounted Rates, And That's Stressing Out Regional Banks

High vacancy rates are opening doors for buyers — literally and figuratively — but not everyone is ecstatic. Buyers are acquiring properties at discounts of up to 70% thanks to rising office vacancies. While these are steal deals, they also signal ongoing pain in the commercial property market, which could lead to big losses for banks and investors.

The Great Office Escape: Commercial real estate (CRE) is grappling with severe challenges despite renewed investor interest and return-to-office policies. The pandemic hit CRE hard, and recovery is so slow that CoStar predicts 2024 and 2025 as the worst years for vacancies — making financing for purchasing or development difficult. Many real estate investment trusts (REITs) and banks lack the money or risk appetite to hold unwanted properties — turning owners into sellers and worsening the crisis.

• This year, 16 office building mortgages have been foreclosed, leading to $500M in losses, with CRE foreclosures surging 117% in Mar. 2024 compared to last year.

• For instance, Yellowstone Real Estate Investments purchased 1740 Broadway in Manhattan for $185M, down from the $600M Blackstone paid a decade earlier.

CRE You Later, Banks

The Silicon Valley Bank collapse highlighted vulnerabilities within regional banks like New York Community Bancorp ($NYCB) related to CRE loans. According to Goldman Sachs, regional banks provide ~80% of all loans to CRE firms and are now under significant strain. The ongoing distress in the CRE market is leading to a high concentration of troubled loans, escalating losses, and increasing the risk of additional bank failures.

• This crisis is reflected in the FDIC's Problem Bank List, which now includes 63 banks burdened by $517B in unrealized losses — up from 43 during the same period last year.

• Due to substantial exposure to CRE loans, Moody's might downgrade the debt ratings of six US banks, including First Merchants ($FRME) and F.N.B. Corp. ($FNB).

Don't bank on relief: The sector might see an increased offloading of stressed loans. Banks are starting to dispose of higher-quality assets to mitigate losses. If conditions worsen, the FDIC might step in to sell these banks or oversee their dissolution, securing depositors' insured funds. This intervention could prevent a bank's failure from triggering a broader financial crisis.

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LARGECAP RECAP

💳 Apple Exits the Buy Now, Pay Later Business As Regulatory Oversight Increases

Apple ($AAPL) had big dreams for fintech domination, but regulatory pressures and a rocky partnership with Goldman Sachs ($GS) have scaled back those ambitions. Earlier this week, the tech giant abruptly shuttered its “buy now, pay later” (BNPL) service, Apple Pay Later, which allowed customers to pay for purchases with interest-free installments. Moving forward, Apple plans to adopt a more traditional approach to offering payment options.

• The decision comes amid an increased regulatory oversight in the BNPL industry, which now requires companies like AfterPay ($SQ) and PayPal ($PYPL) to be treated like credit card companies.

• Apple plans to offer traditional installment loans and BNPL options in Apple Pay through partnerships with legacy banks and BNPL company Affirm ($AFRM).

Shell game: Apple's new approach involves stepping back from direct lending and letting other financial institutions take the lead. Apple Pay customers will soon be able to apply for loans from banks and lenders in Australia, Spain, the UK, and the US when making in-app or online purchases. This shift means Apple Pay will have a global reach and offer more options. These features will launch in the Fall, with more partners expected to join in the future.

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Markets & Economy

Elon Musk faces SEC fraud charges: The billionaire is reportedly facing fraud charges — his fourth major encounter with the SEC in as many years. In response, the agency could seek to prevent him from serving as an officer or director of any public company. Ouch. [Read]

Hurricane season has (finally) begun: After a late start, the Gulf of Mexico, Florida, and Texas are expected to be hit by two tropical storms in the coming week, potentially causing significant flooding and property damage. [Read]

Primo Water and BlueTriton Brands to merge: Primo Water Corp. and BlueTriton Brands have announced a merger agreement, which could create a bottled water market leader for its private equity owners. [Read]

Business & Wealth

Walmart ($WMT) and Amazon ($AMZN) lead summer of deals: Walmart+ Week started on Monday, ahead of Amazon Prime Day, kicking off deals season. Savings are incoming, but perhaps so is increased consumer spending this quarter. [Read]

US Gov sues Adobe ($ADBE) over cancellation concerns: The US government filed a lawsuit against Adobe, accusing the company of hiding termination fees and routes for customers to cancel their subscriptions. [Read]

LG Electronics and ChargePoint announce EV infrastructure partnership: LG's tech and ChargePoint's network will work together to provide efficient and accessible charging solutions for EV owners. Whether this will boost EV adoption remains to be seen. [Read]

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Wake Up To News Summarized In Charts

DIGIT OF THE DAY

Microsoft and Nvidia Will Soon Make Up Nearly 42% of a Major Tech Fund

Green takes the top spot. And we're not just talking about the Boston Celtics. Yesterday, Nvidia ($NVDA) surpassed Microsoft ($MSFT) to become the world's most valuable company — pushing Apple ($AAPL) down to third place. Whether you like it or not, Nvidia is becoming even more significant in portfolios — especially for those invested in the $71B Technology Select Sector SPDR Fund ($XLK), which has risen 23% this year, outperforming both the Nasdaq-100 and S&P 500.

• By this week's end, the tech ETF will rebalance, with Nvidia and Microsoft each representing ~21% of the fund — a jump for Nvidia from its previous 6% share.

• Due to the rebalancing, the fund will acquire over $10B of Nvidia shares — reducing Apple's share from 22% to ~4.5%.

Buy high, sell higher? Nvidia insiders have capitalized extensively on the company's rally, selling over $700M in shares this year — the highest in a half-year period since early 2023. Despite the selling spree, no insider purchases have been made since 2020. Combined with the Nasdaq-100 hitting record highs on Monday, it suggests that the AI-driven market rally might be at risk of faltering.