Looking for a bright light in the commercial real estate (CRE) sector today is like trying to find an apple in an orange grove with less fruitful options.
A few opinions on the near-term future of CRE ride the middle line, but for the most part, analysts are just picking on.
the Wall StreetJournal suggests that commercial real estate could be pretty irrelevant in the future of the nation’s economic growth, at least compared to previous down seasons when the sector rebounded. The newspaper pointed to cities being hurt by depressed building values and, in turn, a loss of property-tax revenue, which will also affect bank performance.
New York-based asset manager Arena Investors CEO Dan Zwirn told the Journal, “You literally have trillions of dollars of investment that are suddenly just massively impaired.”
According to Keefe, Bruyette & Woods research, commercial mortgages account for around 38% of the median US bank’s loan holdings. On average, North American public pension funds hold around 9% of their assets in real estate.
Meanwhile, the newspaper says 50,000 retail stores in the US will close over the next five years. But early signs show there are plenty of brick-and-mortar retail companies willing to fill their vacated space.
New York, as well as tech hubs Seattle and San Francisco, are becoming the epicenters of empty office space, according to CBRE. The global commercial real estate company reports a 7.6% increase in empty office space since the pandemic while Seattle has experienced an 8.2% increase. The most devastating loss of office space workers has occurred in San Francisco, which has experienced a 25.4% increase in vacancies.
Fox Business which issued the dramatic click-bait-inducing headline “Commercial Real Estate Market Could Crash Soon and Here’s Why,” quoted Andy Babula, director of the real estate program at the University of St. Thomas Opus College of Business. Babula blamed some city office space vacancies on workers who don’t want to live in the city.
“People are working from home a lot more now. If they do want to go into the office, they’re going to want somewhere nearby,” Babula said about the decision to move to the suburbs where many employees tend to live.
Fox Business also quoted Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, who said office and retail property valuations could drop 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.
“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,” Shalett said in her weekly notes.
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