These shocks then continued in light of the rise in interest rates (as part of the policies pursued by monetary policy makers to curb inflation) and in light of the consequences of the war in Ukraine on global markets.
The sector has also taken a hit, exacerbating problems, after the bankruptcies of Silicon Valley Bank, Signature Bank and First Republic raised concerns about other regional banks in the United States which account for the bulk of commercial mortgage lending. .
These successive shocks and their serious repercussions on the sector have heightened the state of uncertainty regarding the future of commercial real estate in the short and medium term, and given the general economic situation limited by numerous major tensions , starting with the inflation crisis and ending with the problem of the debt ceiling, passing through a list of related challenges posed by the banking crisis and the turmoil it has caused in different sectors.
As a result, fund managers are warning of mounting problems in the US commercial real estate sector (a $5.6 trillion sector), which could be painful for lenders who have already been hit by recent turbulence in the banking sector, according to a newspaper article. British “Financial Times”.
The newspaper followed the estimates of a group of specialists and their expectations as to the evolution of the commercial real estate sector in the context of anxiety which dominates the markets. Anne Walsh, Chief Investment Officer of Guggenheim Partners, reportedly said:
The pain will be concentrated in certain areas of the United States, including major metropolitan centers such as San Francisco and New York, as well as second-tier office buildings that need repairs. We will probably enter a real estate recession, but not the whole real estate market. Lenders will be very selective about the loans they are willing to make. Some lenders have asked for personal guarantees from homeowners, with borrowers pledging their own assets to secure the mortgage (a sign of tightening lending standards).
Of note, in a Federal Reserve survey earlier this week, the majority of U.S. banks announced they had tightened credit standards for loans secured by nonresidential properties in the first quarter, while none of them have relaxed the standards.
The main causes of the sector crisis
For his part, Gerard Caprio, professor of economics at Williams College, indicated in exclusive statements to “Economy Sky News Arabia” that commercial real estate is a growing problem in the United States due to the significant increase in work. distance that started during the Corona pandemic.. And he adds:
According to a recent Stanford University survey, around 30% of Americans are working from home, up from 5% before Corona and 61% at the height of the pandemic. As a result, the use of office space in major cities has declined. Real estate, particularly commercial real estate, should also suffer from the tightening of lending criteria recently revealed in the Senior Loan Officers (of commercial banks) survey. Tighter credit markets are expected to contribute to a further slowdown in economic growth next year.
And he continues: I will not say that the current events (the failures of 4 American banks) constitute a crisis at this point, but the slowing of growth and a possible recession in the United States will reduce economic activity in the world, and in turn increase loan losses in banks.
He points out that the current political impasse on the debt ceiling could turn into a crisis if it results in delays in payments by the Treasury Department.
The Financial Times report notes that for many years property developers had to borrow cheaply and invest money in a market where asset prices were rising. Tikehau Capital co-founder Mathieu Chabran said: “We are now witnessing a storm of rising interest rates, forcing asset revaluations, as well as a structural decline in occupancy rates and obsolescence of assets”.
risks for banks
And Jay Ritter, a visiting professor at the American University of Florida, said in exclusive statements to the Sky News Arabia Economy site that the problems faced by office buildings or the commercial real estate sector are cause for concern. common for US banks.
He referred to the factor that triggered this crisis in the first place and is related to the “working from home” phenomenon, which has grown following the Corona pandemic, which has caused some office buildings to depreciate. He pointed out that commercial real estate loans have defaults, which affects the profitability of some banks.
And last month Berkshire Hathaway Vice Chairman Charlie Munger warned of a brewing storm in the US commercial real estate market, saying banks were “full” of “bad loans”. “We have a lot of distressed office buildings, a lot of distressed shopping centers and a lot of other distressed real estate,” he added. But at the same time, he believes, the problems were not in the context of the 2008 financial crisis.
risk and threat factors
For his part, the academic director of the Arizona State University Center for Real Estate, Zahi Ben David, points out in exclusive statements to “Sky News Arabia Economy” that “there are several risk factors that threaten the values of the American commercial real estate”. succession” and identifies them as follows:
The first of these factors in his estimate is related to “decline in demand for office and retail space (office real estate)”, as more and more companies adopt remote or hybrid work, the need for traditional office space may continue to decline.
Moreover, the emergence of “e-commerce” may reduce the demand for traditional commercial spaces. These trends have been in effect for several years and are already affecting commercial real estate values.
The second of these factors relates to the heavy reliance of the commercial real estate industry on financing and debt, and with the rise in interest rates over the past few months, the cost of financing has increased, resulting in lower demand for real estate.
The third of these factors, according to the estimate of the academic director of the Arizona State University Center for Real Estate, relates to the extent to which the United States government has reached the debt ceiling, given that unless it If there is a solution to the political impasse in the United States, the government will run out of money at the end of May. If this happens, it is difficult to assess the consequences (affecting all sectors).
“At the extreme, the United States could default on its debt. However, I think that’s not a likely scenario. It is more plausible that a compromise can be found between the White House and the Republican representative, as in the past.
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