NEW YORK–Could some of the factors that led to the demise of several big banks recently and turmoil in the markets also be contributing to another potential “time bomb?” Potentially yes, some analysts are cautioning.
In this case, the risk involves the roughly $20 trillion commercial real estate market.
Commercial real estate, the lifeblood of the lending business, now “faces a huge hurdle,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, warned investors in a note, according to the New York Times, which added, “The sector is precarious thanks to a potentially toxic cocktail of post-pandemic office vacancies, rising interest rates and a mass refinancing of mortgages that lies ahead.”
The report notes More than half of the $2.9 trillion in commercial mortgages will need to be renegotiated by the end of 2025. Local and regional banks are on the hook for most of those loans. And interest rates are expected to continue to rise by as much as 4.5%, Morgan Stanley estimates. That debt load will weigh on businesses even as low occupancy means property values come under pressures.
A ’Chill’
The effect is likely to put a chill on lending, experts told The New York Times. “We are reluctant to declare ‘all clear’ on recent regional banking stress,” wrote Candace Browning, who heads global research at Bank of America, in a note, the Times reported.
“The economic impact is vast. Even as it struggled with the effects of the pandemic, commercial real estate — including office buildings, shopping malls and warehouses — contributed $2.3 trillion to the U.S. economy last year, an industry association calculated,” the Times said. “How the sector would weather a looming lending crunch is unclear.”
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