Commercial real estate is being rattled by this year's crises. A recession in the sector might be at hand, experts say.
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Phil Rosen
May 11, 2023, 17:21 IST
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Happy Friday eve, readers. Phil Rosen here, clocking in from NYC.
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There's a lot to say about financial markets these days — the debt ceiling is a fast-approaching crisis, the banking sector has been rattled by failures, and stocks are still fighting the Fed.
The secondary impacts of these risks are less obvious. What happens in each worst-case scenario?
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1. A major indicator of difficulties stemming from this years' crises: Commercial real estate lending plummeted 56% in the first quarter of 2023 compared to the same time last year.
The Mortgage Bankers Association reported the data Tuesday, and added that loans saw a 42% drop-off from the prior quarter.
It's true, lending activity does usually slow down this time of year, but this reading marks the slowest pace since 2014.
"Uncertainty and volatility in regards to interest rates and property values, and supply demand imbalances for some property types, has led to a logjam in commercial real estate sales and financing markets," MBA's head of commercial real estate research Jamie Woodwell said.
The banking mess that started with Silicon Valley Bank's implosion in March exacerbated many issues, while experts have also warned about the declining demand for office buildings as work-from-home remains popular.
Apartment buildings, too, have seen a drop in demand, with sales seeing their largest crash since 2008.
Meanwhile, there's still nearly $450 billion in commercial real estate loans that are set to mature in 2023, and much of that was originally financed at lower interest rates.
JPMorgan estimates roughly 20% of those could default.
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All this, according to top executives, gives reason to believe a real-estate recession is on the way.
"We're likely going into a real-estate recession, but not across the entire real estate market," Guggenheim Partners' investment chief Anne Walsh told the Financial Times this week. "Lenders will be very choosy about what loans they are willing to make."
"The equity will be first," Kleinman said. "That's the next shoe to drop in the US. Like everything else, it has been priced so tightly and there hasn't been a commercial real-estate crisis in the US since the '90s."
What's your outlook for commercial real estate? What other factors are at play? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.
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