The commercial real estate sector is on the brink of a significant wave of bankruptcies, posing a threat to economic recovery and the already weakened banking industry, caution experts interviewed by the Daily Caller News Foundation.
According to a report from market research group Trepp, the 30 day+ delinquencies on commercial mortgage-backed securities (CMBS) have surged from 2.96% to 4.63% as of October compared to a year ago. Analysts emphasize that these delinquencies signal potential bankruptcies, heightening concerns for both the banking industry and the broader economy. Desmond Lachman, a senior fellow at the American Enterprise Institute, describes the situation as a “slow-moving train wreck,” attributing it to a decline in occupancy rates following the post-COVID shift towards remote work.
Office vacancy rates have continued to rise since the pandemic, reaching around 20% in the third quarter of 2023, up from 13% in 2019. This shift, accelerated by the pandemic, has been a critical factor in the migration from traditional brick-and-mortar purchasing to online transactions, creating a lasting impact on consumer behavior.
Trepp’s data reveals a substantial increase in delinquency rates for offices, soaring from 1.75% last year to 5.75% in October 2023. Industrial and multifamily property delinquencies have also seen notable rises. Retail, while remaining stable, has a delinquency rate of 6.55% in October 2023, a slight decrease from the previous year.
The repercussions of a commercial real estate slump are extensive, potentially leading to job losses, canceled construction projects, and freezing existing developments. Small and medium-sized banks, which hold a significant portion of commercial real estate loans, face heightened risks, especially after the banking crisis earlier in the year.
The Federal Reserve’s decision to raise the federal funds rate to a range of 5.25% to 5.50%, the highest in 22 years, aims to combat inflation but adds pressure to an already strained industry. Amid concerns, lending for commercial and multifamily mortgages dropped by 49% year-over-year in the third quarter of 2023, according to Market Insider.
With around $1.5 trillion in debt needing repayment and increasing possibilities of defaults, experts are sounding the alarm, emphasizing the commercial real estate sector’s potential to derail the economic recovery. Lachman concludes that both the Federal Reserve and the markets may not be adequately addressing the imminent risks associated with this crisis.
