Morgan Stanley analysts have issued a stark warning regarding the commercial real estate market in the wake of banking turmoil after the collapse of Silicon Valley Bank (SVB) and Signature Bank last month.
Shalett pointed to multiple stock investors who have declared that the bear market is “over,” but noted that further turmoil in regional banking could tighten loan standards, which could in turn impact the real estate industry, an industry largely dependent on debt.
“Commercial real estate, already facing headwinds from a shift to hybrid/remote work, has to refinance more than half of its mortgage debt in the next two years,” Shalett wrote.
The chief investment officer noted that more than 50 percent of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely increased by 350–450 basis points.
Office Vacancy Rates Soar
Shalett also noted commercial real estate has “primacy on the balance sheets of the regional banks,” which in the past cycle accounted for 70–80 percent of all new loan originations.Commercial real estate prices have “already turned down and office vacancy rates have moved toward a 20-year high,” Shalett noted.
Morgan Stanley analysts forecast a peak-to-trough commercial real estate price decline of as much as 40 percent, according to Shalett, who added that that figure is “worse than in the great financial crisis” of 2008–09.
“Distress of this type has historically not only hurt the landlords and the bankers who lend to them but also the interconnected business communities, private capital funders, and owners of any underlying securitized debt,” Shalett continued. “The tech and consumer discretionary sectors will not be immune.”
Musk Weighs in on ‘Looming Issue’
Industrialist Elon Musk has also warned that the Federal Reserve raising interest rates could impact the commercial real estate industry and possibly set off an economic downturn, dubbing it “by far the most serious looming issue. Mortgages too.”“This is by far more than any five-year period in history,” “The Kobeissi Letter” said, noting that rates have more than doubled and commercial real estate is only 60–70 percent occupied, which could trigger loan defaults.
“Refinancing these loans is going to be incredibly expensive and likely lead to the next major crisis. The worst part? Seventy percent of commercial real estate loans are owned by small banks. Rapidly rising rates are teaching everyone a valuable lesson,” it added.
The Federal Reserve raised interest rates by 25 points, increasing the benchmark federal funds rate to a range of 4.75–5.00 percent at the end of March and has not signaled a drop in rates anytime soon.
