Commercial real estate crash still looming over US economy
https://www.foxbusiness.com/economy/commercial-real-estate-crash-looming-us-economyThe threat of a commercial real estate market crash is hanging over the already fragile U.S. economy.
About $1.5 trillion in commercial mortgage debt is due by the end of 2025, but steeper borrowing costs, coupled with tighter credit conditions and a decline in property values brought on by remote work, have increased the risk of default.
Fitch Ratings already estimated that 35% — or $5.8 billion — of pooled securities commercial mortgages coming due between April and December 2023 will not be able to be refinanced.
"Commercial real estate is melting down fast," Tesla CEO Elon Musk said in a recent tweet. "Home values next."
Could the commercial real estate crash be on par with 2008? After commercial real estate, homes could be next.
"MS & Co. analysts forecast a peak-to-trough CRE price decline of as much as 40%, worse than in the Great Financial Crisis," Shalett wrote in a weekly investment note. "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."
Complicating the matter is the fact that small and regional banks are the biggest source of credit to the $20 trillion commercial real estate market, holding about 80% of the sector's outstanding debt. Regional banks were just at the epicenter of the upheaval within the financial sector, and there are concerns that the turmoil could make lending standards drastically more restrictive.
During a credit crunch, banks significantly raise their lending standards, making it difficult for businesses or households to get loans. Borrowers may have to agree to more stringent terms like high interest rates as banks try to reduce the financial risk on their end.
Many regional banks are credit sources for commercial real estate market.