In a new report released by Morgan Stanley Wealth Management, the company’s chief investment officer, Lisa Shalett, is predicting a worse economic crash than the 2008 financial crisis in commercial real estate.
Shalett wrote, “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.”
The market is facing a “huge hurdle,” with a commercial real estate decline “of as much as 40 percent worse than in the Great Financial Crisis,” she continued.
Due to pandemic-era lockdowns with companies purging office space due to the lack of need for in-person offices, empty commercial buildings remain. “Office vacancy rates have moved toward a 20-year high,” noted Shalett.
The strain on commercial real estate has been exacerbated by the March banking crisis with the collapse of Silicon Valley Bank and the instability of others, such as First Republic Bank. This, mixed with the Federal Reserves’ astronomical interest rate hikes from nearly zero percent to around 4.75 percent, are fanning the flames.
Tesla and Twitter mogul Elon Musk has also raised this same concern, writing that commercial real estate “is by far the most serious looming issue. Mortgages too.”
CNBC reported, “The vacancy rate for office buildings rose to a record high 18.2% by late 2022, according to brokerage giant Cushman & Wakefield, topping 20 percent in key markets like Manhattan, Silicon Valley and even Atlanta.”
“The solution will lie in a combination of factors. The amount of loans that come up for refinancing drops sharply after this year, and new construction is already slowing as it does in most real estate downturns, and loan to value ratios in the industry are lower than in 2006 or 2007, before the last recession.”
Moody’s Analytics’ director of commercial real estate Kevin Fagan said, “There’s a lot of headaches about calamity in commercial real estate,” noting, “There likely will be issues but it’s more of a typical down cycle.”