Commercial real estate could face a reckoning this year as property values continue to fall, according to Capital Economics.
The research firm pointed to the difficulties commercial real estate faced last year, with property values falling an estimated 11%. Prices are set to fall another 10% this year, the firm estimated, spelling trouble for the mountain of debt backed by commercial buildings.
“Distress is only just emerging and 2024 could be the year the dam bursts,” Capital Economics deputy chief property economist Kiran Raichura warned in a note on Tuesday.
Raichura noted calls of “impending doom” for the sector, especially after banking turmoil tightened credit conditions in early 2023.
“But the evidence so far has been mostly anecdotal and lenders appear to have not been significantly impacted,” Raichura added. “We expect clearer signs of distress in 2024.”
That distress will likely include a swelling number of bankruptcies, mergers, and forced property sales, Raichura warned. Other owners, meanwhile, will continue to “extend and pretend,” he said, implying big commercial landlords could negotiate to push out the maturity date of their loans while they hope for the situation to improve.
Falling prices have hit the office sector particularly hard amid persistent work-from-home trends.
Higher interest rates have also taken their toll. Higher rates push down a building’s net operating income — a building’s total revenue after operating expenses have been subtracted. That can push down property values as well, with Capital Economics previously estimating a 43% peak-to-trough decline in the sector over the coming years.
Higher rates have also made refinancing existing debt much more expensive for borrowers and risky for lenders. That’s a huge problem for commercial property owners, who have around $1.5 trillion of debt that’s approaching maturity.