Only after a major collapse, according to about two-thirds of the 919 respondents surveyed by Bloomberg, do they expect the US office market to recover. An even larger majority predicts that the bottom will not be reached in US commercial real estate prices until the second half of 2024 or later.
The $1.5 trillion in commercial real estate debt that, according to Morgan Stanley, is due before the end of 2025 is negatively impacted by this. It won’t be simple to refinance, particularly since offices make up around 25% of commercial real estate. From its peak in March 2022, a Green Street index of commercial property prices has already dropped 16%.
The Federal Reserve’s aggressive tightening effort is having a significant negative impact on commercial property values by raising one of the major expenses of property ownership: the cost of financing. However, there aren’t many purchasers who are confident the market is close to a bottom, so lenders trying to dump their exposure now are finding few agreeable possibilities.
Lea Overby, an analyst at Barclays Plc, stated that “nobody wants to sell at a huge loss.” “These are properties that don’t need to be sold for a long time, so holders will probably put off a sale as long as they can,” the author said.
Stress among smaller banks, which as of 2022 held approximately 30% of office block debt, is aggravating the situation, according to a March research from Goldman Sachs Group Inc. After Silicon Valley Bank and Signature Bank failed, smaller banks’ deposits decreased by almost 2% during the course of the past 12 months that concluded in August, according to the Fed. reduced funding for the banks results in reduced lending capacity for them.
It may take years for owners of US commercial real estate, which Morgan Stanley values at a total of $11 trillion, to feel the effects of higher interest rates. Office block investors, for instance, frequently have long-term fixed-rate financing in place, and their tenants may also be bound by long-term contracts.
According to data by Moody’s Investors Service published in March, it won’t be until 2027 until leases now in place roll over to reduced revenue expectations. Revenues will be 10% lower by that time if current trends continue.
When interest rates move, US real estate usually experiences a gradual adjustment, according to Overby of Barclays. Additionally, the office sector is in severe trouble and will take a long time to recover.
Overby is unconcerned that a severe and protracted decline in US commercial real estate, including significant loan losses from a collapsing office sector, could endanger the stability of the market as a whole. Despite the size of the real estate industry, the debt is adequately distributed among a variety of investors.
Along with rising borrowing rates, workplaces are having trouble keeping renters. This trend is particularly pronounced in the US, where employees are less likely to badge in than in Europe or Asia. The discomfort from the commute may have contributed to some of the aversion to going back to work. More than 40% of MLIV Pulse respondents claimed that greater public transport alternatives would encourage them to visit the office more frequently.
Only 3% of respondents said they regretted leaving during the pandemic, while about 20% indicated they moved further away from their office. A third or more said that their journeys grew longer than they were before Covid, most likely as a result of moving or reduced transit service during the pandemic.
The Bloomberg Markets Live team, which also manages the MLIV blog, conducts the weekly MLIV Pulse survey of Bloomberg News readers online and on the terminal. The MLIV Pulse survey this week includes a question about quarterly earnings. Do you believe shops will give profit warnings or surprise customers with optimistic predictions? Post your opinions here.