December 9, 2023

Commercial real estate market could face a crash that rivals the 2008 financial crisis this year.

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Office and retail property valuations could fall as much as 40% from peak to trough this year, according to Lisa Shalette, chief investment officer at Morgan Stanley Wealth Management, as higher interest rates make it harder for investors to refinance trillions of looming debt.

Analysts at MS & Co. forecast CRE prices to drop from peak to trough by as much as 40%, worse than during the Great Financial Crisis,” Shalette wrote in a weekly investment report. note. “More than 50% of $2.9 trillion in commercial mortgages will need to be renegotiated over the next 24 months, when new lending rates are likely to rise by 350 to 450 basis points.”

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The situation is complicated by the fact that small and regional banks are the largest source of credit for the $20 trillion commercial real estate market, which accounts for about 80% of the sector’s outstanding debt. Regional banks are at the epicenter of financial sector turmoil, and there are fears that these turmoils could lead to credit standards are much more stringent.


During a credit crunch, banks raise their lending standards significantly, making it difficult for businesses or households to get loans. Borrowers may have to agree to tougher terms, such as high interest rates, as banks try to reduce their financial risk.

Banks were tightening lending standards even before the crisis in the industry. A quarterly survey Loan Officers published by the Fed showed that a growing number of banks have tightened lending standards and reduced demand in the last three months of 2022.

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“Refinancing risks are prime and central” for commercial property owners, Morgan Stanley said in a separate note. “The wall of maturity here is loaded in advance. As well as the associated risks.

Even before the collapse of Silicon Valley Bank and Signature Bank in early March, the commercial real estate market was facing a number of challenges, including rising interest rates and declining demand for office space as more companies allow employees to work from home.

“Commercial real estate, already hit by a hybrid/remote shift, is set to refinance more than half of its mortgage debt in the next two years,” Shalette wrote in a weekly report released this week.

Federal Reserve has raised interest rates nine times from near zero to 4.75% or more and is expected to approve a 10th rate hike at its next meeting scheduled for May 2-3. This is the sharpest jump in borrowing costs since the 1980s.

However, others are less pessimistic about the future of the commercial real estate market. Solita Marchelli, chief investment officer at UBS Global Wealth Management Americas, said the office space headlines are “worse than reality.”

“The expected credit crunch amid rising funding costs for banks could further exacerbate his problems,” Marchelli said in a note. But she added: “We don’t see a repeat of the liquidity crisis of 2008, when capital markets virtually closed for funding, as likely.”

“In our opinion, the state of the entire banking system and market liquidity conditions are much better than they were during the [Great Financial Crisis].”

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