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Analysis: CRE prices expected to fall even further

The combination of the COVID-19 pandemic and the Federal Reserve’s inflation fight has driven down commercial real estate prices, but Morgan Stanley analysts say they’ve yet to hit bottom, Market Watch reports.

Overall, apartment buildings, office properties and retail centers’ prices are forecast to be between 8 and 14 percent lower than they were in May from peak levels. Things are likely to get worse, per Morgan Stanley’s Ronald Kamden and his REIT research team. The group still forecasts a 27.4% “peak-to-trough” price drop for all CRE property types through the end of next year.

CRE prices fell almost 35 percent during the global financial crisis about 15 years ago. There was also a period that followed that saw prices increase nearly 150 percent during the pandemic, however, per Morgan Stanley data. While CRE prices are falling overall, retail, industrial and office properties in the suburbs and central business districts are still facing most of their anticipated price declines “as transaction activity and distressed sales rise,” the Morgan Stanley REIT research team wrote in a client note.

Office CRE to see a major price drop

Hybrid work models, tighter credit and increased interest rates could increase the pain half-empty office buildings throughout financial districts in major U.S. cities are already enduring, Market Watch reports. Demand for office CRE space could fall by as much as 38 percent from 2019 levels, per a June McKinsey Global Institute report. McKinsey also said office prices could drop approximately 26 percent on average in a moderate scenario through 2023, but as much as 42 percent in severe circumstances.

BofA Global’s Alan Todd and other researchers noted that the pressure the office sector’s feeling could spill over into other CRE areas such as hotels and retail, by making refinancing more difficult.

“For example, to the extent airline costs remain elevated, flight cancellations remain a common problem, or corporate belt tightening limits fly-to in person meetings, we see it as a headwind for hotel revenues, which can fluctuate significantly with the public’s ability or willingness to travel,” Todd’s team wrote in a weekly client note.

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