According to a newly released survey from Bloomberg Markets, a growing number of analysts are becoming concerned about a “crisis” that is developing in America’s commercial real estate market.
Per Bloomberg’s latest Markets Live Pulse survey, $1.5 trillion of debt has accumulated in the commercial real estate market. And a majority of analysts now forecast that office prices in the U.S. will eventually crash, leading to at least nine months of declines in the commercial real estate sector. Additionally, a majority of respondents say U.S. commercial real estate prices aren’t likely to hit bottom until the second half of 2024.
The pulse survey is conducted weekly by Bloomberg Markets and covers various topics of interest to investors.
Multiple Problems for Commercial Real Estate
About two-thirds (67%) of 919 respondents to the Bloomberg survey anticipate a coming collapse in the U.S. office market within the next year. Commercial real estate has been in the doldrums since the onset of the Covid-19 pandemic in March 2020 and has continued to experience high vacancy rates and depressed prices as work-from-home trends continue. Interest rates that are now sitting at a 22-year high have added to the sector’s woes.
In a recent note to clients, investment bank Morgan Stanley said that there is $1.5 trillion of commercial real estate debt that’s coming due before the end of 2025. Morgan Stanley noted that refinancing that debt won’t be easy, particularly as demand for office space remains weak nationwide. Higher interest rates are hitting the commercial property sector extremely hard right now, pushing many players to the sidelines as the expense of financing is viewed as prohibitive. Speculators continue to wait for the market to hit rock bottom.
Complicating Factors
In addition to the downturn in the commercial real estate market, another complicating factor is the ongoing stress among regional banks. In the U.S., regional lenders currently hold nearly 30% of office building debt, according to investment bank Goldman Sachs. Many of these smaller banks continue to struggle with high interest rates themselves. As well as increased capital requirements and heightened risk aversion following the failures of Silicon Valley Bank and Signature Bank earlier this year.
This is all to say that regional banks could get into trouble with their debt exposure to the commercial real estate sector, and investors shouldn’t expect the regional lenders to come riding to the rescue in the event that the market melts down. However, while there is likely to be pain ahead in the commercial real estate sector, it is unlikely that it will spill over into the overall stock market and cause widespread instability. The U.S. property sector is large and diverse, and the debt owing is spread out, with many investors capable of absorbing losses.
What’s Next
The commercial real estate market is more of a slow-moving train wreck than a sudden implosion. Higher interest rates take a while to be felt in the real estate sector. This is because mortgages and leases tend to be multi-year in duration, and rates don’t reset at higher levels all at once. Some analysts say it could take until 2027 for the impact of higher interest rates to become visible across the entire commercial sector.
Regardless, commercial real estate, particularly office space, remains a trouble spot, and investors would be wise to avoid it for now.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
