Economists Worried About The Current State Of Commercial Real Estate
Economists are currently worried about the state of the $20 trillion commercial real estate industry. Ever since the beginning of the Covid-19 pandemic, office and retail property values have fallen due to lower occupancy rates, and the shift to working from home and rise in online retail.
According to Goldman Sachs economists, about 80% of all bank loans for commercial properties are coming from regional banks; smaller banks have had more pressure to liquidate properties as time goes on and the properties don’t show a lot of interest.
“I do think you will see banks pull back on commercial real estate commitments more rapidly in a world [where] they’re more focused on liquidity, and I do think that is going to be something that will be important to watch over the coming months and quarters,” wrote Goldman Sachs Research’s Richard Ramsden, reported by CNN.
Xander Snyder is a senior commercial real estate economist at First American who recently spoke to the media about the current state of the commercial real estate market and its potential threats to the economy.
“Price growth is slowing and for some asset classes it’s starting to decline. Office properties have been more challenged than others for obvious reasons.”
“Now private lending to the industry is starting to slow as well — bank lending was beginning to dry up over a month before the Silicon Valley Bank failure even happened. Credit was getting scarce for all commercial real estate and a fresh bank failure on top of that only exacerbates that trend,” Snyder explained.
“A lot of people hear commercial real estate and they think it’s all the same thing and the trends are they’re all the same but they’re not. The underlying fundamentals of multifamily and industrial assets remain relatively stable on a national level.”
Snyder then explained exactly why commercial real estate ended up in the position it’s in today after the trends it saw within the past few years:
“As credit becomes scarcer and more expensive, it’s hard to know exactly what buildings are worth. You get this gap opening up between sellers and buyers: Sellers want to get late 2021 prices and buyers are saying ‘we don’t know what things are worth so we’ll give you this lowball offer.’ That was already happening and the result of that price differential was bringing deal activity down.
It’s different for office and retail properties. There’s been a fundamental shift in how we use office space and that has changed demand. That’s something you should have your eye on, especially as low-interest office loans come due.
We’re running into a situation where office-owners have to refinance at a higher rate and only 50% of the building is being used. That doesn’t translate to good cash flow metrics for the lender,” he explained.
According to The National Association for Business Economists’ (NABE) most recent survey, published this Monday, a majority of economists are predicting a recession to occur this year as inflation rates will likely remain above 4%.
“Panelists generally agree on the outlook for inflation and the consequences of rate hikes from the Federal Reserve. More than seven in ten panelists believe that growth in the consumer price index (CPI) will remain above 4% through the end of 2023, and more than two-thirds are not confident that the Fed will be able to bring inflation down to its 2% goal within the next two years without inducing a recession,” said NABE Policy Survey Chair Mervin Jebaraj.
Eric Mastrota is a Contributing Editor at The National Digest based in New York. A graduate of SUNY New Paltz, he reports on world news, culture, and lifestyle. You can reach him at eric.mastrota@thenationaldigest.com.
