- Moody’s chief economist said commercial real estate prices are expected to fall 10% from their peak with the wave of defaults.
- “Very high CRE prices are declining, with prices expected to be 10% peak-to-trough by mid-decade,” said Mark Zandi.
- Tensions are rising in the commercial property industry as investors worry it could be a domino of a downturn in the US economy.
Prepare for a 10% drop in commercial real estate prices from their peak and a wave of defaults, according to Moody’s chief economist.
one in series of tweetsMark Zandi highlights concerns that commercial real estate (CRE) could be the “next shoe to fall” in the economy following the turmoil in the banking sector following the collapse of Silicon Valley Bank.
“Very high CRE prices are declining, with prices expected to be 10% peak-to-true by mid-decade,” he said.
Zandi said the stress in commercial property is caused by a combination of several adverse factors – including higher interest rates, tightening credit conditions and a reduction in demand for office buildings due to the work-from-home trend.
“Demand for space is weak due to remote work and online retailing. Too many multifamily units are being built. And it’s harder to get credit to refinance and buy property,” he said.
With excessive exposure to small and medium-sized regional lenders in the commercial real estate sector – funding approximately 70% of all loans in the commercial property industry – investors have become increasingly concerned about the overall health of the US financial system.
However, Zandi noted that in the face of rising loan delinquencies and defaults, a banking crisis is unlikely to rule.
“CRE loan delinquencies and defaults will certainly increase, causing agitation for the banking system. But this should not be a catalyst for a revival of the banking crisis. Limiting losses is the large price due to the substantial equity built up in most assets.” advantage during the pandemic,” Zandi said.