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Over the past few years, there have been some signs that commercial real estate is headed for a major decline. The office vacancy rate will reach approximately 18% in 2023, the highest level in 30 years. In response to new remote and hybrid work norms, large and small companies are drastically cutting back on space, and some are terminating leases early.
But one of the most frightening numbers about the doom that commercial real estate is headed for is the total amount of mortgages maturing in 2024.The Mortgage Bankers Association (MBA) predicts that $929 billion of the $4.7 trillion in outstanding commercial mortgages held by financial institutions and lenders will be sold to investors this year, according to the report. will reach the deadline Commercial real estate loan maturity amount survey The report was released on Monday.
“Volatility and uncertainty surrounding interest rates, uncertainty about property values, and questions about some real estate fundamentals are dampening sales and financing transactions,” Jamie Woodwell, head of commercial real estate research at MBA, said in a statement. “I am doing so,” he said.
Kevin Fagan, head of CRE economic analysis at Moody's Analytics, said the problem is particularly acute for office buildings. luck, Here, “the current vulnerabilities to CRE real estate performance are highly concentrated.” This will be troublesome for some tenants who may “have trouble refinancing in a high interest rate environment, which could further slow demand for commercial real estate,” he said.
surplus office space
A fall in demand for office space will lead to further oversupply. Last year, Cushman & Wakefield predicted that there could be 1 billion square feet of unused office space by the start of the new decade, but as loans mature and more leases become available. This situation is likely to worsen further as the period approaches its end.
The drop in demand could also mean an oversupply of office space, leading to significant price declines and putting lenders and landlords in a bind. In fact, Morgan Stanley notes that office prices could face a 30% price decline, or “price correction,” due to lower demand.
“Office as a real estate type faces long-term challenges,” the bank said in a note on Sunday. “Demand for office real estate is unlikely to return to pre-pandemic levels. This means that real estate valuations, lease agreements, and financing structures will need to be adjusted to the post-pandemic realities of office working. This change has begun, and there will be more to come.”
Citing data from Real Capital Analytics, the bank added that office prices are already down 20% from their peak. In mid-December 2023, Capital Economics released its outlook for 2024, predicting that commercial real estate asset values will decline by 11% in 2023, followed by a further 10% decline in 2024.
Commercial real estate prices and low occupancy rates are indicative of the dire situation facing the market, but that's not the whole story, said Michael Immerman, assistant professor at the University of California Irvine Paul Merage School of Business. luck.
“It's more about the financing that's being done,” he said, explaining that many commercial real estate developers took out large loans after the 2009 global financial crisis when interest rates were low. Many of those loans are now due.
“Interest rates have increased significantly over the past 18 months, so the owners of these properties – real estate developers and investors – will have to refinance at even higher rates,” he said. “Coupled with low occupancy rates, there is no chance that these loans will be repaid and we will see a large amount of commercial real estate loan delinquencies in the coming years.”
This is already happening. Mortgage-backed commercial real estate delinquency rates increased by 6.5% in the fourth quarter of 2023, according to the January MBA report.
“Due to continued challenges in the commercial real estate market, delinquency rates for CRE-backed loans increased in the final three months of 2023,” Woodwell said in a statement. “Long-term interest rates have fallen from last year's highs, which should provide some reassurance for some loans, but many real estate properties and loans remain subject to rising interest rates, uncertainty in property values, and some We are facing changing fundamentals in real estate.”
