The slump in the world’s biggest asset class has spread from the housing market to commercial real estate, Bloomberg News reported. This in turn threatens to unleash waves of credit turmoil across the economy.
Globally, nearly $175 billion of real estate credit is already distressed, according to data compiled by Bloomberg. That’s about four times more than the next biggest industry, software and services.
“As the toll from higher interest rates and the end of easy money mounts, many real estate markets are almost frozen with some lenders telling borrowers to sell assets or risk foreclosure amid demands for additional capital from landlords,” reported Bloomberg.
In particular, distress levels in European real estate are at the highest in a decade, in part because of a decline in liquidity, according to a study by law firm Weil, Gotshal & Manges. UK commercial property values fell more than 20% in the second half of 2022, MSCI Inc. data show. In the U.S., the drop was about 9%, according to Green Street.
The fall in transactions and development in commercial and residential real estate will inevitably impact spending in the real economy. In turn, that could pose a risk to jobs and growth.
“What we have in this downturn is a fairly unique set of economic circumstances,” Ian Guthrie, a UK-based senior managing director at JLL’s loan advisory team, told Bloomberg. “Interest rates are tightening instead of softening the blow for real estate and other corporates.”
As a result, he said, “You have a pipeline of potentially defaulting loans” where “values are under pressure and cash flows are under pressure.”
This year, he added, “is when those problems will start to manifest themselves.” About one in 10 corporate loans in Europe is already underperforming and showing increased credit risk, according to JLL.
The signs of a downturn are mounting in the U.S., with job cuts rippling beyond the tech sector. But despite a dip, commercial property values “are still moderately overpriced,” Michael Knott, head of US REIT Research at Green Street, told Bloomberg.
Knott expects another 5% to 10% decline this year. “Appraisers are behind the curve; transaction activity has slowed down considerably,” he said.
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