Investors in commercial real estate face higher borrowing costs, scarce financing, and maturing debts, which spells trouble for the wider US economy.
Carlos Barria/Reuters
Brutal headwinds are buffeting US commercial real estate, threatening to hit prices and hammer the wider economy, Goldman Sachs strategists have warned.
The CRE sector is navigating a "nearly perfect storm" of much higher interest rates, a credit crunch, and about $1 trillion of debt maturing in the next 12 to 18 months, Jeffrey Fine said during a recent episode of the "Exchanges at Goldman Sachs" podcast.
"We've got a big rightsizing of the market that we're going to have to confront," Goldman's global head of real estate client solutions and product strategy said.
The Federal Reserve has raised interest rates from virtually zero to upward of 4.75% over the past 13 months in an effort to curb historic inflation. Higher rates make borrowing more costly, and typically weigh on riskier assets such as stocks and real estate as investors shift their money into savings accounts and government bonds that offer guaranteed returns.
The surge in rates played a key role in the sudden collapse of Silicon Valley Bank and Signature Bank in March. The failures have scared customers into moving their deposits from smaller banks to bigger ones and money-market funds, and spooked lenders into pulling back out of fear of further bank runs.
The result is that CRE investors, who rely heavily on financing from smaller banks, face higher borrowing costs and tighter credit just as they're looking to refinance their debts. Those challenges could lead to a spike in defaults and a decline in property prices.
"I think you will see a further drop in valuations," Fine said about the most exposed parts of the CRE sector, including older properties and office buildings grappling with declining occupancy levels and slowing rent growth.
He noted that obtaining CRE loans now is "almost impossible" as financing has "almost completely shut down."
The real-estate guru also warned there could be serious fallout if authorities don't intervene. He cautioned that if defaults jump, banks won't want to take possession of assets that are expensive to maintain and may be in need extensive renovations.
"Over time there's going to have to be a very organized public and private partnership to figure out a careful unwind of this current dynamic," Fine said. "Otherwise, we have a very messy situation on our hands."
Fine added that the sector's troubles could spread to other industries and pull down the prices of other assets. When CRE financing dries up at a time when debts are coming due, "the outcome can be really upsetting to the overall economy," he said.
