The $20.7 trillion U.S. commercial real estate market, one of the largest such markets in the world, is facing the prospect of a sharp downfall, whose repercussions would be felt in the U.S. and Western banking systems, and perhaps everywhere in the world.
In April, Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, put out, in her weekly memo, a forecast of a possible 40% decline in commercial real estate prices: “Morgan Stanley & Company analysts forecast a peak-to-trough CRE [commercial real estate] price decline of as much as 40%, worse than in the Great Financial Crisis [of 2007-2009].” That means that the prices of the properties would fall, and therefore the rents that the owners of the buildings would be able to charge, and the income they would take in, would fall, just as the interest rates that they would have to pay to refinance the loans with which they bought the buildings were sharply rising. This is a precondition for bankruptcy.
In February, a PIMCO-owned office landlord defaulted on an adjustable rate mortgage on seven office buildings in New York, New Jersey, and California, when monthly payments on loans rose, due to high interest rates. In the same month, Brookfield, the largest owner of offices in downtown Los Angeles, defaulted on loans on two buildings.
Commercial real estate includes: office buildings ($3.8 trillion in “value”); retail stores ($3.2 trillion); hospitality buildings ($1.6 trillion); industrial buildings ($2.4 trillion), etc. Some of the buildings are useful for the economy, some are not. They are all, however, greatly overpriced, due to speculation in such properties, and thus have, in many cases, overleveraged fictitious values.
