In the next two years, commercial real estate will need to refinance more than half of its mortgage debt due to challenges brought on by the pandemic-induced onset of remote and hybrid work, and the outlook gets bleaker from there. According to Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, commercial real estate values could fall as much as 40 percent from their peak, a crash worse than what was felt during the financial crisis of 2008.
“With property prices posting negative year-over-year comparisons and the office vacancy rate nearing a 20-year high, the commercial real estate market is vulnerable to any adverse developments in interest rates or bank lending,” writes Shalett. “More than half of the nearly $2.9 trillion in CRE mortgages will be up for refinancing in the next 24 months, and regional banks account for 70 percent to 80 percent of the loans. Even if current rates stay flat, the new lending rates are likely to be 350 to 450 basis points higher.”
Big real estate investors who are trying to refinance a ton of loans may run into difficulties because of high borrowing costs and tighter credit standards brought on by the financial crisis. Then there’s the lessened occupier demand for office space now that remote and hybrid work trends have taken hold, which is putting pressure on real estate valuations.