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- Fears are on the rise that commercial real-estate could be where the next economic shock could emanate from.
- A combination of high interest rates, work-from-home trends and tighter credit conditions could hit commercial property owners, and their lenders, top voices have said.
- Here’s what Elon Musk, Bill Ackman, Jim Chanos and others have to say about the $2 trillion commercial building market.
The past year’s surge in US interest rates has already triggered the biggest banking turmoil since the 2008 financial crisis.
From top economists to Wall Street banks, a growing chorus of experts is warning that commercial real estate could be where the next cracks appear.
High borrowing costs and tighter credit conditions caused by the banking jitters could raise hurdles for big property owners as they seek to refinance a pile of loans. Nearly $450 billion in commercial real-estate debt is due to mature in 2023 – meaning a final payment on those loans are due, per data cited from Trepp by JPMorgan.
The Federal Reserve has raised benchmark interest rates to 5% currently from almost zero 12 months ago – that’s the steepest jump in US borrowing costs since the 1980s.
What’s making things worse is the fact that occupancy rates in offices across the country are still far from pre-pandemic levels thanks to remote work trends – and that’s weighing on property valuations. Against that backdrop, odds are on the rise that commercial property owners could default on their debt.
It could be the perfect storm for the already-embattled US regional banks, given their large loan exposure to the sector. Such lenders hold almost 70% of outstanding commercial property debt, according to BofA.
Here’s what seven top voices and banks have to say about the $2 trillion US commercial real-estate market.
Elon Musk, Tesla and SpaceX CEO
“This is by far the most serious looming issue,” the tech guru tweeted on Saturday. “Mortgages too.”
The Tesla, Twitter, and SpaceX CEO was responding to The Kobeissi Letter, after it highlighted that a record $2.5 trillion in commercial real-estate debt will expire over the next five years.
“This is the real problem,” Musk responded. “Many cities have high office vacancy rates. Mortgage portfolios are at risk too if housing prices drop significantly.”
Bill Ackman, Pershing Square CEO
“A lot of the construction lending and real-estate lending and small business lending is done by these smaller banks. Commercial real estate is a major part of our economy. If these banks lose all their capital and deposits, that will cause a meaningful slowdown,” Ackman said during an episode of the 20VC podcast.
Jim Chanos, famed short-seller and Chanos & Co. boss
“Commercial real estate was really an attractive asset on the way up,” Chanos said. “It becomes in bad markets, poor credit markets, a really bad asset — and everybody forgets that,” the short-seller and Chanos & Company boss said.
“There are so many moving parts now that are below that surface that will impact valuations that you might not be aware of,” he added.
Bank of America
“Commercial real estate [is] widely seen as next shoe to drop as lending standards for CRE loans to tighten further,” Bank of America’s Michael Hartnett said in a note.
“We expect about 21% of commercial mortgage-backed securities outstanding office loans to default eventually, with a loss severity assumption of 41% and forward cumulative losses of 8.6%… Applying the 8.6% loss rate to office exposure, it would imply about $38 billion in losses for the banking sector,” JPMorgan said.
“Furthermore, regional banks are a lot more stressed which reduces their ability to amend and consent to loan modifications given the pressure on the liability side of the balance sheet,” the bank added.
Scott Rechler, CEO of NYC-based real estate company RXR Realty
“There is $1.5 trillion in commercial real estate debt maturing in the next 3 years. The bulk of this debt was financed when base interest rates were near zero. This debt needs to be refinanced in an environment where rates are higher, values are lower, & in a market with less liquidity,” Rechler said in a tweet this week.
“I have joined @TheRERoundtable in calling for a program that provides lenders the leeway and the flexibility from regulators to work with borrowers to develop responsible, constructive refinancing plans… If we fail to act, we risk a systemic crisis with our banking system & particularly the regional banks,” Rechler said.
Adam Posen, American economist and president of the Peterson Institute for International Economics
“I expect a major correction in commercial real estate is already under way,” said Adam Posen, president of the Peterson Institute for International Economics, in an interview with MarketWatch, adding that the commercial property sector is heading for a “real mess.”
“We haven’t seen smooth repricing or terribly transparent repricing of the mortgages and commercial-real-estate lending that is held in nonbank financial intermediaries,” Posen said.