- Experts are increasingly sounding the alarm about U.S. commercial real estate.
- These woes could spill over into the banking industry, which is heavily affected by this sector.
- Here are four red flags Wall Street is seeing in the commercial real estate market.
A potential financial crisis looms over the debt-ridden U.S. commercial real estate sector, which could come to a boil as early as next year, real estate experts warn.
The market has been nervous around commercial real estate since early 2023, with the failure of Silicon Valley Bank raising concerns about the sector’s $1.5 trillion in debt nearing maturity.
The alarm bells for the industry are growing louder in response to concerns about interest rate prolongation. Defaults and delinquencies appear to be on the rise. On the other hand, real estate values continue to decline, especially for office buildings due to the prolonged trend of working from home.
As the commercial real estate sector faces its liquidation, here are four things experts expect going forward.
1. Sluggish office prices
Office real estate prices are expected to fall another 20% in 2024, according to recent estimates from Capital Economics, citing slower growth and persistently high interest rates.
“While new supply is slowing, we believe that reduced demand continues to be the primary driver of vacancy growth, and that this vacancy situation will persist for several more years,” the ministry said in a memo.
The firm predicted that the US office market would fall 43% from peak to trough and warned that it could take more than 20 years for real estate values to return to their early 2020 peaks.
2. Bank losses
According to a recent research report released by the National Economic Bureau, banks could lose about $160 billion from commercial real estate, which accounts for about a quarter of the average lender’s assets.
Other market commentators, such as hedge funder Kyle Bass, are predicting losses of up to $250 billion.
“It’s one of those asset classes that has to be restarted, and restarting means tearing it down,” he said earlier this year of underperforming office buildings.
Bloomberg previously reported that major banks such as JPMorgan, Goldman Sachs and Capital One are already shedding risky assets from their commercial real estate portfolios. But he added that some companies are struggling to secure buyers and are holding out for better deals.
3. Rising defaults
Approximately 14% of all commercial real estate properties are already in “negative equity,” meaning the value of the building is less than the outstanding debt, and 10-20% of all commercial real estate loans are at risk of default. The NBER paper states that there is. Added. This corresponds to the lower bound of default rates estimated during the Great Recession.
Late payments on commercial real estate loans are already starting to accumulate, with the office loan delinquency rate reaching 5% this year, according to data provider Trep.
Meanwhile, overall commercial real estate debt jumped $37 billion last quarter, largely due to unpaid interest on unpaid loans, according to the Mortgage Bankers Association.
MBA said: “While the decline in sales transactions and refinances means there is less new borrowing, this also means fewer loans are being repaid than in many previous years. It also means that.”
4. “Zombie” Office
A recent Treasury paper says office buildings could soon be abandoned as the work-from-home trend continues to take hold, with some commercial properties facing the same fate as ‘zombie’ malls during the pandemic. It is said that there is a possibility of doing so.
Some malls were later converted into warehouses, distribution centers, or mixed-use spaces. More creative renovations included a cricket stadium, a police station, and a cannabis farm.
The paper added: “There are striking similarities between the current CRE office sector and pre-consolidation regional malls, and there is growing evidence that CRE may experience a similar decline.”
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