Is commercial real estate set to see another shock?

by Editor

In case it does, Bloomberg reported that well-known lenders for commercial real estate, particularly offices, are looking at selling their loans in low-demand areas like New York. Among them are Barclays, Deutsche Bank, and JPMorgan Chase.

The fact that some lenders are providing reductions ranging from 3 percent to 25 percent shows how driven they are to get rid of debt. Debt agreements are generally kept out of the public eye, and many discussions about selling debt have been handled in private.

The risk that lenders face is that the assets used as collateral for their loans won’t be valued at enough to cover the loan total, or that the owners of the properties won’t be able to pay the debt service.

For banks, selling loans is just part of doing business. What isn’t, though, is the difficulty they are facing in finding customers. Hence the reductions.

According to the Federal Reserve, lenders granted $316 billion in commercial loans throughout the nation in the first half of the year. Lenders are now changing their stance as a result of rising interest rates and problems with specific commercial property types.

Many people are now reluctant to originate debt because they believe that future inflation and rate increases would lower the value of such loans. Instead of locking in fixed-rate loans at exorbitant interest rates, several participants in the commercial real estate industry are taking out variable-rate loans.

Lenders to businesses are reacting to the industry-wide decline in real estate values. The Green Street Commercial Property Price Index shows that commercial prices are down 13% from a May peak. The greatest losers are malls, which have seen their values fall by 23%, while even industrial prices have fallen by 17% since May.

Office landlords could suffer the most in the long run. According to research conducted by Arpit Gupta of NYU and Vrinda Mittal and Stijn Van Nieuwerburgh of Columbia University, New York City’s office stock would lose $49 billion, or 28 percent, of its value by 2029.

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