US Commercial Real Estate Predictions Getting ‘Ugly’
The U.S. commercial real estate (CRE) market may crash soon and cause a ripple effect that could lead to a downturn as significant as the 2008 crisis, said a prominent real estate investment CEO.
Speaking in an interview last week, Patrick Carroll, the CEO of the real estate investment firm Carroll, told CNBC that the market would likely turn sour in the coming years as large amounts of commercial mortgage debt hit maturity.
In recent weeks, industry analysts and executives have issued warnings since the fall of Silicon Valley Bank and said that large amounts of commercial mortgage debt held by banks would have to be refinanced. A report from Business Insider noted that some 80 percent of commercial property debt is held by medium- or small-sized banks.
“Unfortunately, in the situation we’re in, things need to bottom out, and they haven’t bottomed out yet,” said Patrick Carroll, CEO of the real estate investment firm Carroll, told the broadcaster on April 13.
“It’s going to be ugly. It’s going to be at least as bad as ’08, ’09,” he warned, referring to the 2008 and 2009 economic recessions that sparked a bevy of federal bailouts.
A report from Reuters dated April 14 said that several of the largest American banks have warned that an area of growing concern is office commercial real estate as property values fall and as more borrowers default on their loans amid increasing interest rates, relatively high inflation, and a slowing economy.
Executives at Wells Fargo and Co., Citigroup Inc., and JPMorgan Chase told Reuters and others that the sector’s conditions were worsening. “Weakness continues to develop in commercial real estate office,” Wells Fargo Chief Executive Charlie Scharf said on a call with analysts, reported Reuters. In contrast, Scharf said the bank set aside an additional $643 million in the first quarter for credit losses, mainly driven by expectations of higher commercial real estate loan losses.
JPMorgan Chief Executive Jamie Dimon said he expected tighter lending conditions, most of it around “certain real estate things,” and that “increases the odds of a recession.” And Wells Fargo Chief Financial Officer Mike Santomassimo said the office market is now showing “signs of weakness due to lower demand, higher financing costs, and challenging capital market conditions,” the report said.
“While we haven’t seen this translate to meaningful loss content yet, we expect to see more stress over time,” Santomassimo said.
According to Citigroup analysts, banks represent 54 percent of the overall $5.7 trillion commercial real estate market, with the small lenders holding 70 percent of commercial real estate loans. More than $1.4 trillion in U.S. CRE loans will mature by 2027, with some $270 billion coming due this year, according to Reuters and real estate data provider Trepp.
Loans backed by offices comprise the most significant share of the maturing debt load, followed by multifamily and retail properties. The question now facing many borrowers is whether they can refinance or restructure loans to avoid default, bankers and analysts said. Older properties with high vacancies face the greatest refinancing challenge, they said, according to the outlet.
The Reuters article, citing bank CEOs and analysts, noted that the debt held by banks would have to be refinanced in tougher conditions due to higher interest rates and tightening credit availability.
“Sellers are not realizing how much their properties have lost value, and they’re not willing to dump their properties yet because they haven’t felt enough pain. They’re about to start feeling pain. These lenders are screwed,” said Carroll in the CNBC interview, adding that $1.5 trillion in commercial real estate debt will be due within three years or so. That debt, he said, needs to be renegotiated or refinanced.
Also, bankers and analysts told Reuters that the most significant stress in the office sector is likely to be felt in large cities such as San Francisco, Los Angeles, New York, and Seattle. Cities in the southern United States have a lower share of risky loans, said Stephen Buschbom, research director at Trepp.
“The regions with the highest level of office stress are located in the Northeast and tech-heavy West Coast,” he told Reuters.
The Federal Reserve Bank of New York echoed Buschbom’s sentiments last week in a post on its website.
“While the residential rental market has bounced back, the retail and office markets have remained slack—largely due to the shift to remote work and online shopping,” the New York Fed said on April 13. It said that commercial rents in Manhattan are down significantly from their pre-COVID-19 levels.
“This weakening trend may continue as more and more commercial tenants roll off leases that were negotiated when demand for office and retail space was far stronger,” the post said.
Reuters contributed to this report.
