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HomeNewsletterLatest NewsletterPredicted CRE economic crash could be worse than ’08 financial crisis

Predicted CRE economic crash could be worse than ’08 financial crisis

A recent Morgan Stanley report has forecasted that the commercial real estate industry could suffer a worse economic crash than the 2008 financial crisis, Newsweek and multiple news outlets report.

“Commercial real estate, already facing headwinds from a shift to hybrid/remote work, has to refinance more than half of its mortgage debt in the next two years,” Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, wrote in Morgan Stanley’s weekly report published on April 3.

Shalett acknowledged that the CRE market faces a “huge hurdle” as analysts forecast an industry decline “of as much as 40 percent worse than in the Great Financial Crisis.”

Silicon Valley Bank’s recent collapse, alongside other financial institutions’ falls have created more concern about CRE, Newsweek reports. There’s also anticipation surrounding how increased interest rates will continue to impact various markets.

CRE took a big hit in 2020 during the COVID-19 pandemic. Offices closed across the country, but as buildings began to reopen, many workers opted to continue to work from home, leaving a lot of office buildings at least partially vacant.

“CRE prices have already turned down and office vacancy rates have moved toward a 20-year high,” Shalett said.

Shalett also noted that that regional banks are carrying a large amount of risk as small and medium-sized banks currently hold 80 percent of outstanding U.S. CRE debt, according to Yahoo Finance. The fallout from the banking turmoil was more expensive borrowing costs and stricter credit terms, which could make it more difficult for big CRE investors to refinance their loans. Meanwhile, approximately $450 billion CRE debt is due to mature this year, per Trepp by JPMorgan.

“The collapse of Silicon Valley Bank puts the spotlight on venture capital,” Shalett said. “According to Morgan Stanley strategist Edward Stanley, start-ups were already being forced to take in much-needed capital at an illiquidity discount to public markets. Even with this, Stanley notes that US venture is extremely overpriced versus global peers.”

The CRE office industry continues to struggle as hybrid and remote working trends have lowered consumer demand for office space, and in turn decreased property valuations.

“Distress of this type has historically not only hurt the landlords and the bankers who lend to them, but also the interconnected business communities, private capital funders and owners of any underlying securitized debt,” Shalett said. The tech and consumer discretionary sectors will not be immune.

“While a soft economic landing is still possible, the odds of that have decreased given recent regional banking turmoil and the implications of tighter lending standards to major sectors of the economy.”


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