The coming threat to commercial real estate, construction and jobs

5.9.23 - The coming threat to commercial real estate, construction and jobs

With $1.5 trillion in loans maturing in the next two years, developers and landlords need more time to restructure and repay debt

As the U.S. emerges from the COVID-19 pandemic, much attention has been given to rising inflation and the interest-rate hikes to combat it. But there is another looming threat with equally impactful and widespread implications for consumers and the economy: commercial real estate. About $1.5 trillion worth of commercial real estate loans are due to mature over the next two years, at a steep increase.

The combination of the tightening of lending conditions and loans refinanced at higher, unsustainable rates could potentially stifle construction and development in major cities struggling to bounce back from the pandemic.

To avoid inflicting more far-reaching economic uncertainty, the Federal Reserve and the financial services regulatory agencies should grant more time for borrowers - including corporate real estate developers - to restructure commercial real estate loans.

This strategy has a proven track record of success. During the 2008-09 financial crisis and again in the COVID-19 pandemic, similar programs provided financial institutions flexibility to work constructively with borrowers. In the summer of 2022, the Board of Governors at the Fed proposed a comparable policy. Granting borrowers more time to adjust the economic climate makes more sense than pushing loans that could result in more foreclosures and bankruptcies.

Failure to act will hurt more than just those holding these loans. The perfect storm brewing from higher interest rates, lower real estate values and an illiquid market will burden consumers, businesses, stall affordable housing expansion and further imperil the health of our major metropolitan areas.

Consider that the bulk of commercial real estate loans were financed when base rates were near zero - far below today's rates closer to 5%. Not only are the rates higher, but the real estate values are much lower, especially in cities afflicted with high vacancy rates from ongoing work-from-home policies. Prior to the pandemic, 95% of U.S. offices were occupied. Today, that number is closer to 47%. The drop wiped out $453 billion of commercial real-estate value, according to the U.S. National Bureau of Economic Research (NBER).