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Office market difficulties will not hinder economic growth similar to the housing crisis.


Jun 10, 2023

The commercial real estate market is facing challenges that could worsen in the next two years. Due to high vacancy rates, office space is under pressure to liquidate while property owners are faced with the task of refinancing $1 trillion in debt due over the next five years. Commercial real estate experts who spoke at the National Association of Real Estate Editors conference in Las Vegas this week believe that the market could be on the verge of a crash, similar to the 2008 housing collapse. However, they also state that the problem is a local, not global, problem, and should not fall into a spiral.

Richard Bercomb, the global chief economist at commercial real estate firm CBRE, indicates that the residential real estate market, which cooled the economy in 2008, was worth around $43 trillion, while the total commercial real estate market is valued at about $21 trillion. Not all classes of commercial real estate are under pressure; the industry is performing well, hotels are recovering, and retail space remains to be in demand. Although apartment developers may create more units in the short-term, there will ultimately be a housing shortage that will absorb the increased supply.

Bercomb states that the primary issue lies within office space. Approximately 15% to 20% of the current office supply is expected to become obsolete due to current demand. The growing concentration of commercial real estate debt on the balance sheets of small commercial banks and regional banks is also a potential concern. Analysis found that around 311 banks would be at risk of falling in a worst-case scenario, due to a decline in the value of the collateral supporting their loans. However, this is not at a scale comparable to the bankruptcy of Lehman, AIG, or Washington Mutual.

Jim Costello, the chief economist at MSCI, believes that the reduction of bank lending could hurt commercial real estate due to a decrease in credit lines extended to bond funds, although the exact reason for this is unclear. However, there is a lot of capital available, and private equity firms are raising funds to buy bad debts and assets. Pricing remains a key factor, but there is a lot of capital willing to step in at the right price to prevent a collapse.

By Editor

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