USA’s Commercial Real Estate Faces Potential Disaster
Real estate experts have warned that a potential financial disaster is looming over America's debt-ridden commercial real estate sector, and it could boil over by next year. Markets have been concerned about commercial real estate since the beginning of 2023, when the collapse of Silicon Valley Bank raised concerns about the $1.5 trillion of debt in the sector approaching maturity.
According to a recent estimate from Capital Economics, office property prices are likely to fall by a further 20% in 2024, citing weak growth and still-high interest rates. The firm predicted a peak-to-trough decline of 43% in the US office market, warning that it could take two decades or more for property values ??to return to their peak in the early 2020s.
According to a recent working paper from the National Bureau of Economics, banks could lose about $160 billion from commercial real estate, about a quarter of the average lender's assets. Other market commentators, such as hedge funder Kyle Bass, have predicted losses of up to $250 billion.
Big banks like JPMorgan, Goldman Sachs and Capital One are already trying to remove risky properties from their commercial real estate portfolios. However, some are having trouble securing a buyer and are trying to negotiate a better deal.
About 14% of all commercial real estate properties are already in a “negative equity” situation, meaning the value of the building is less than the outstanding loan, and 10%-20% of all commercial real estate loans may default. Yes, NBER paper added. This is at the low end of the default rate estimate during the Great Recession.
Late payments on commercial real estate loans have already begun to rise, with the office loan default rate reaching 5% this year, according to data provider Trepp. Meanwhile, commercial real estate loans overall increased by $37 billion last quarter, according to the Mortgage Bankers Association, largely due to interest accrued on outstanding loans.
Office buildings may soon be abandoned as the work-from-home trend continues, according to a recent Treasury Department paper that said some commercial real estate properties could face the same fate As was the case with “zombie” malls during the pandemic.
Some malls were later converted into warehouses, distribution centres or mixed-use spaces. More creative conversions included a cricket stadium, a police precinct and a cannabis farm. The paper states, “There are striking similarities between the CRE office sector today and regional malls before their integration, and there is growing evidence that CRE may be experiencing a similar decline.”
