US commercial real estate faces potential disaster
Real estate experts are warning that a potential financial crisis looms over America’s debt-ridden commercial real estate sector and could explode by next year. The market has been concerned about commercial real estate since early 2023, with the failure of Silicon Valley Bank heightening concerns that the sector’s $1.5 trillion in debt was nearing maturity.
Office real estate prices could fall another 20% in 2024 due to slowing growth and still-high interest rates, according to recent estimates from Capital Economics. The firm predicted a 43% decline in the U.S. office market from high to low and warned that it could take more than 20 years for real estate values to return to their early 2020s highs.
Banks could lose about $160 billion from commercial real estate, equivalent to about a quarter of the average lender’s assets, according to a recent research report from the National Bureau of Economic Affairs. Other market commentators, including hedge funder Kyle Bass, predict losses of up to $250 billion.
Big banks like JPMorgan, Goldman Sachs and Capital One are already trying to eliminate risky properties from their commercial real estate portfolios. But some companies are having trouble securing buyers and are trying to negotiate better deals.
Approximately 14% of all commercial real estate properties are already in a “negative equity” situation, meaning the value of the building is less than the loan balance, and 10-20% of all commercial real estate loans are at risk of default. there is. Yes, the NBER paper has been added. This corresponds to the lower bound of the estimated default rate during the Great Recession.
Late payments on commercial real estate loans have already started to rise, with office loan default rates reaching 5% this year, according to data provider Trepp. Meanwhile, overall commercial real estate loans increased by $37 billion last quarter, largely due to unpaid interest on loan balances, according to the Mortgage Bankers Association.
Office buildings could soon be abandoned as the work-from-home trend continues, with some commercial properties facing the same fate as ‘zombie’ malls during the pandemic, according to a recent Treasury document 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 substation and a cannabis farm. “There are striking similarities between the current CRE office sector and pre-consolidation regional malls, and there is growing evidence that CRE may be experiencing a similar decline,” the paper said. Says.