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If you’re a commercial real estate investor or lender, you’re probably getting twitchy at the moment. An explosion of negative news has emerged in recent months, predicting defaults on billions of dollars of loans and plunging asset values through the end of this year. Indeed, Twitter owner and Tesla Founder Elon Musk offered his views about the CRE market on Twitter, recently.
The data supports the unwelcome news. If you look at this list of real estate ETFs, while I understand not all of these are purely commercial real estate, and that ETFs are also exposed to broader market risk as well as idiosyncratic real estate risk, if you spend a few minutes clicking around this list you’ll see that most are well below their starting point at the beginning of this year, reflecting the general malaise in the CRE space.
The underlying challenge, of course, is specific to offices. I found this piece from Goldman Sachs quite an informative read. It spells out the nuances of the challenges in the space, and spoiler alert – there is an interesting trend in occupancy rates in newer vs. older buildings. But certainly, the ‘new normal’ – not so new anymore – of working from home or hybrid working has demonstrated remarkable stickiness, with many companies deciding that they don’t need as much office space as they had previously, or in some cases, they don’t think they need any office space at all, leading to lower occupancy rates.
Swiss Re thinks that any correction in the US commercial real estate market would last several years. But I’m interested to see the extent of it. US nonfarm payroll was up again in May, so companies generally seem to be doing well. And some of these workers will still be sat in an office some of the time. And if employment numbers continue to grow in the coming months, that’s more people who will need an office some of the time.
Distressed real estate investors might be licking their lips at the moment at the prospect of non-performing loans coming to market. And refinancing is as tough as it’s been for years, now that the Fed raised rates again in May. But the US economy is a pretty resolute beast. Will there be a hard or a soft landing? Does it help those in the real estate market that one of the world’s most influential people Tweets something not amazing about the CRE space? Probably not. But don’t be surprised if there’s not the hard landing that the naysayers are predicting.
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Gregory Poapst is a Managing Partner at Fundviews Capital. Connect with him on LinkedIn here.
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