The Commercial Real Estate Time Bomb Ticks Closer to Detonation

April 19, 2023

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Almost a month on from our article highlighting the crisis looming for commercial real estate (CRE) in 2023, and signs are not looking up. In fact, more experts have started sounding the alarm, including drawing the attention of the White House.

With recent high-profile defaults and auctions, we might be seeing just the tip of the iceberg, with more dire news likely in the upcoming months and years. Real estate giant, Brookfield Corp., has defaulted on $161.4 million of office building mortgages, primarily in the Washington D.C. area, after its initial default of $784 million of mortgages in February has experts predicting that more defaults are coming down the line. In fact, just weeks after the initial default, Pacific Investment Management Co. also defaulted $.1.7 billion, signaling to the industry that the wave had not broken yet.

The iconic Flatiron Building had also been forced to go into auction, where the winning bidder failed to make the required deposit payment, an appropriate sign of the times, likely meaning it would go back up for auction.

Additionally, according to the Wall Street Journal, five to ten office towers become at risk of defaulting each month, with no signs of slowing down.

Piling on the doom and gloom, billionaire investor Howard Marks, in a memo released on April 17, commented on the stress that small and medium-sized banks would feel due to their outsized financing of CRE. “No one knows whether banks will suffer losses on their commercial real estate loans or what the magnitude will be.” He writes, “But we’re very likely to see mortgage defaults in the headlines, and at a minimum, this may spook lenders, throw sand into the gears of the financing and refinancing processes, and further contribute to a sense of heightened risk.”

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All this ominous activity has even caught the attention of the White House.

On Tuesday, the White House said it was closely tracking commercial real estate developments after recent banking sector strains. Jared Bernstein, a member of the White House Council of Economic Advisers (CEA), said during a hearing on his nomination to head CEA that “The issue was very much on our watchlist.”

What does this mean for the immediate future?

It’s tough to say. CRE continues to feel pressure from elevated interest rates, low occupancy, and limited refinancing options, with more properties likely to default or face foreclosure. The Feds playing an active role in moderating the market to account for inflation and their quick intervention during the Signature and Silicon Valley banks collapse could mean that action might be taken to avert a complete crisis. However, there is no doubt that commercial real estate investors will feel a pinch in the coming months at the very least, so you’ll want to evaluate your CRE portfolio and keep an eye on further developments.

And to help you out, we’ll keep watching the clock and keep you updated here.

Before you go – as a savvy investor, you may be looking to invest in real estate in the near future. Whether you take the risk and dive into commercial or play it safe and invest in housing or REITs, you’ll likely require financing. And you’ve already found the best source for reliable, affordable loans with REI News. Contact our team of experts to get matched with the best lender for your exact need.