Everyone's Talking About End of Iran War, but Not This Growing Concern

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Markets staged a massive rebound on Tuesday with the Nasdaq rising over 3.8% on the day -- the tech-heavy index’s best daily performance since last May. It was a broad-based rally with the small-cap Russell 2000 climbing more than 3.4% Tuesday. The trigger for the rebound was increasing hopes that the regional war in the Middle East will soon be over. Interestingly, there wasn’t a big decline in the energy markets as one would expect if there was fire behind this smoke. Albeit crude oil prices are declining further Wednesday morning and the POTUS is now scheduled to address the nation today around the conflict with Iran.

Even if hostilities were to cease tomorrow, however, and the Strait of Hormuz was fully opened for business by the end of this week, it will take time to restart chemical plants, smelters and refiners and to assess and repair the damage to core assets in the Gulf countries. In addition, there are still significant concerns around the private credit markets. Most of the consumer base is also struggling, and that was before the recent spike in gasoline and diesel prices.

And there is an under-the-radar concern that is getting little mention in the financial press these days. That is the continuing deterioration in both the residential and commercial real estate markets. Trepp came out with its monthly look at commercial mortgage-backed securities or CMBS for March this week. The overall CMBS delinquency rate moved up just over 40-basis points to 7.55%. CMBS delinquency rates on both the lodging and multi-family sectors both moved decisively through the seven percent threshold again. Multi-family is particularly important as it accounts for more than 40% of the roughly $5 trillion of CRE debt outstanding. And rents nationally have fallen for six of the last eight months and the apartment vacancy rate is at the highest rate since records on this metric started to being kept. And rents are falling significantly in some Sun Belt cities like Austin, which saw a surge of new apartment construction following the pandemic.

The CMBS delinquency rate for office properties moved to nearly 12%, significantly higher than the peak of the Great Financial Crisis. Office values that have collapsed in many major cities, especially for B and C rated properties, and some $600 billion in office CRE debt that needs to be refinanced in 2026 and 2027. We may finally get some additional price discovery in the coming quarters. This could lead to more mark to market actions and write offs for lenders.

Residential real estate is not off to its hoped for rebound in 2026 after three years of moribund existing home sales. New home sales in January plunged in front of the key spring selling season. This is really starting to hit the numbers of the home builders and is a headwind to housing related concerns like Home Depot (HD) . With incentives like mortgage rate buy downs, Lennar’s (LEN) average home sale price is back down to 2017’s levels. KB Home (KBH) just reported a quarter where revenues dropped 23% year-over-year, and the average home sale price declined more than 9% from the same period a year. Home building net income collapsed nearly 75%.

So, while resolution to the war in the Middle East will be welcomed by investors and trigger a further rebound in the overall markets, we are not out of the woods on many fronts. And real estate, both commercial and residential, is one off the radar issue prudent investors should keep a watchful eye on.

At the time of publication, Jensen had no position in any security mentioned.