Commercial real estate crash still looming over US economy

The threat of a commercial real estate market crash is hanging over the 
already fragile U.S. economy. 

About $1.5 trillion in commercial mortgage debt is due by the end of 2025, 
but steeper borrowing costs, coupled with tighter credit conditions and a 
decline in property values brought on by remote work, have increased the 
risk of default. 

Fitch Ratings already estimated that 35% — or $5.8 billion — of pooled 
securities commercial mortgages coming due between April and December 2023 
will not be able to be refinanced. 

"Commercial real estate is melting down fast," Tesla CEO Elon Musk said in 
a recent tweet. "Home values next."

Office and retail property valuations could ultimately plummet as much as 
40% from peak to trough this year as higher interest rates make it harder 
for investors to refinance trillions in looming debt, according to Lisa 
Shalett, chief investment officer for Morgan Stanley Wealth Management.

"MS & Co. analysts forecast a peak-to-trough CRE price decline of as much 
as 40%, worse than in the Great Financial Crisis," Shalett wrote in a 
weekly investment note. "More than 50% of the $2.9 trillion in commercial 
mortgages will need to be renegotiated in the next 24 months when new 
lending rates are likely to be up by 350 to 450 basis points."

Complicating the matter is the fact that small and regional banks are the 
biggest source of credit to the $20 trillion commercial real estate 
market, holding about 80% of the sector's outstanding debt. Regional banks 
were just at the epicenter of the upheaval within the financial sector, 
and there are concerns that the turmoil could make lending standards 
drastically more restrictive.

During a credit crunch, banks significantly raise their lending standards, 
making it difficult for businesses or households to get loans. Borrowers 
may have to agree to more stringent terms like high interest rates as 
banks try to reduce the financial risk on their end.

"I do think there will be issues with commercial real estate," Treasury 
Secretary Janet Yellen said Wednesday during an interview with CNBC. But 
she suggested that banks will be able to handle the strains ahead.

Banks were already tightening lending standards before the crisis within 
the industry began. A quarterly survey of loan officers published by the 
Fed showed that a growing number of banks tightened lending standards and 
saw a sharp slowdown in demand during the final three months of 2022.

"Refinancing risks are front and center" for commercial property owners, a 
separate Morgan Stanley note said. "The maturity wall here is front-
loaded. So are the associated risks."

Even before the collapse of Silicon Valley Bank and Signature Bank in 
early March, the commercial real estate market was struggling with a 
number of challenges, including higher interest rates and waning demand 
for office space as more companies allow employees to work from home.

"Commercial real estate, already facing headwinds from a shift to 
hybrid/remote work, has to refinance more than half of its mortgage debt 
in the next two years," Shalett wrote in a weekly report published last 
month.

The Federal Reserve has raised interest rates 10 times over the past year 
from near zero to around 5%. Policymakers have indicated that another rate 
hike could be on the table this year amid signs of underlying inflationary 
pressures.

Still, others are less pessimistic about the future of the commercial real 
estate market. Solita Marcelli, UBS Global Wealth Management chief 
investment officer of Americas, said the headlines regarding office space 
"are worse than reality."

"An expected credit crunch on the back of rising cost of funding for banks 
may further compound its troubles," Marcelli said in a note. "We don’t 
believe a repeat of the 2008 liquidity crisis is likely — where capital 
markets essentially closed for financing.

"In our view, the health of the overall banking system and market 
liquidity conditions are substantially better than they were during the 
[Great Financial Crisis]."

https://www.foxbusiness.com/economy/commercial-real-estate-crash-looming-
us-economy