The threat of financial disaster looms over the US commercial real estate debt sector, and a turning point could come as soon as next year, experts warn. Markets have been nervous about the sector since early 2023, when the collapse of a Silicon Valley bank raised concerns about $1.5 billion in debt nearing maturity. Concerns have grown over the prospect of higher interest rates for a longer period. The number of defaults and crimes appears to be on the rise. Meanwhile, property values continue to decline, especially in office buildings, which are impacted by the strong trend to work from home. Business Insider names four signs of further deterioration of the situation. Office prices fall © unsplash.com Office prices will fall another 20% in 2024 amid weak economic growth and still-high interest rates, according to recent estimates from Capital Economics. “While new supply is slowing, declining demand continues to be the primary driver of vacancy growth, which we expect to continue for several years,” the company said. The firm predicted a 43% decline in the US office market from peak levels recorded in early 2020. And she warned it could be two decades or more before property values return to those levels. Bank losses © klik.net Banks could lose about $160 billion on commercial real estate, which is about a quarter of the average lender’s assets, the National Economic Bureau predicts. Other market commentators, such as investor Kyle Bass, forecast losses of $250 billion. “This is one of the asset classes that needs to be remade, and rehab means tearing it down,” he said earlier this year of substandard office buildings. Major banks such as JPMorgan, Goldman Sachs and Capital One are already trying to divest risky assets from their commercial real estate businesses, according to Bloomberg. Some, however, have difficulty finding buyers and try to wait for a better deal. Defaults are on the rise © unsplash.com About 14% of all commercial real estate is already in “negative equity,” meaning the building is worth less than the outstanding debt on it. Trepp estimates that commercial real estate loan delinquencies are already starting to pile up, with office loan delinquencies reaching 5% this year. Total commercial real estate debt jumped $37 billion last quarter, largely due to accrued interest on outstanding loans, according to the Mortgage Bankers Association (MBA). “Lower sales volumes and refinance transactions have resulted in fewer new loans, but it also means fewer loans are being repaid than in many previous periods,” MBA said. Zombie Offices Office buildings may soon be abandoned as “work from home” trends continue to gain momentum. A Treasury report says some commercial properties could suffer the same fate as zombie shopping centers during the pandemic. Some shopping centers have since been converted into warehouses, distribution centers or mixed-use spaces. More creative conversions included a cricket stadium, a police station and a hemp farm. “There are striking similarities between today’s office sector and pre-consolidation regional shopping centers, and there is growing evidence that it may experience a similar downturn,” the document states.
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