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"Commercial Real Estate Collapse Trigger 80% Loss
In Property Value & Enormous Surge Of Bankruptcies"
by Epic Economist
"A cataclysmic commercial real estate collapse is happening in plain sight and no one seems to be talking about it. We’ve just recorded the biggest month-over-month property value drop since the global financial crisis. The sector is facing an increasingly dire situation fueled by weakening demand, record storefront vacancies, a shift to remote working, and souring credit conditions. Experts say that the slump in the world’s biggest asset class has spread from the housing market to commercial real estate, and now a flood of distressed loans can result in an 84% value destruction and unleash serious turmoil all across the U.S. economy.
A recent study by NYU scholars is using the word “apocalyptic” to describe the crisis that is now unfolding before our eyes. By analyzing data provided by research firm Green Street, commercial property prices have already dropped by 13% in 2023, the largest monthly decline since it began tracking this data in 2007, in the run-up to the global financial crisis. NYU professor Arpit Gupta and his team point to a looming “commercial real estate apocalypse,” with office prices declining 84% in less than five years. Since 2020, commercial property values have fallen by 45%, and according to their projections, another 39% collapse is going to take place by 2025. That represents a “$453 billion value destruction”.
Moody’s Analytics documented that Securities backed by commercial mortgages saw “a huge spike in elevated delinquency rates” in the past quarter. “What we have in this downturn is a fairly unique set of economic circumstances. Interest rates are tightening instead of softening the blow for real estate and other corporates,” said Ian Guthrie, a senior managing director at the loan advisory team at Jones Lang LaSalle Inc., a real estate broker. The Federal Reserve has already hiked interest rates seven times, and it’s not finished yet, which means that the environment for borrowers and lenders is expected to deteriorate even further as the months go by.
Right now, one of the biggest risks in commercial real estate is older and less desirable office and retail space. New reports indicate that private equity investors are walking away from the sector due to rising uncertainty about the future of commercial properties amid raging inflation and construction and financing costs during the recession.
Almost $175 billion of real estate credit is already distressed, according to data compiled by Bloomberg. At the moment, about one in 10 corporate loans in the U.S. is already underperforming and showing increased credit risk, Bank of America reported. The combined meltdown of both commercial and residential real estate is unprecedented in all of U.S. history. The amount of wealth that can be wiped out from the system can reach the trillions before this is all over.
We are in for a very rough ride, and we have very limited alternatives. The resilience of U.S. businesses and consumers is at stake, and while thousands upon thousands of companies can disappear in that process, Americans can lose everything they have ever fought for. This is not just a housing and commercial real estate collapse. This is a reflection of a broken economy and a decaying society. While the sector’s apocalypse looms over us, now more than ever, we need to keep one eye on the danger."
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