Here's why a potential crash in the commercial real estate market could look like the 2008 crisis
By Jennifer Sor
April 16, 2023
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The commercial real estate sector could see a 2008-like crash, according to one CEO.
A crash may be coming for the commercial real estate market, and the fallout could be as bad as what was seen in the 2008 crisis, according to the CEO of a real estate investment firm.
Speaking in an interview this week, Patrick Carroll, the CEO of the real estate investing firm Carroll, told CNBC that the market is looking at a dire situation in coming years as huge amounts of commercial mortgage debt reaches maturity.
"Unfortunately in the situation we're in, things need to bottom out, and they haven't bottomed out yet," Carroll said in an interview with CNBC on Thursday. While some areas of commercial real estate, such as multifamily housing, could stay intact, he predicted areas like offices and hotels would be "destroyed" – similar to what other commentators have warned for the sector as it faces tighter credit conditions and a wall of debt maturities.
"It's going to be ugly. It's going to be at least as bad as '08, '09," he warned.
Industry experts have been sounding alarms for the commercial real estate sector since the fall of Silicon Valley Bank last month, warning that high levels of commercial mortgage debt held by banks will need to be refinanced in much tough conditions in coming years. Approximately 80% of commercial property debt outstanding is held by small- and medium-sized banks.
Though regional banks have stabilized and fears of a wider banking crisis have ebbed, the collapse of SVB means many banks will be less willing to lend amid a lower base of deposits since the March crisis. Those that continue making loans will be doing so at much higher interest rates than when many commercial mortgages were originally finance.
The stress in the market could soon bubble to the surface, as $1.5 trillion in commercial real estate debt comes due in the next three year, Carroll said, at which point it will need to be refinanced or renegotiated somehow.
"Sellers are not realizing how much their properties have lost value, and they're not willing to dump their properties yet because they haven't felt enough pain. They're about to start feeling pain. These lenders are screwed," Carroll warned.
Morgan Stanley has warned that commercial estate prices could plunge 40% as tighter financial conditions weigh on the sector. Bank of America clients, meanwhile, pulled over $450 million from real estate stocks shortly after the SVB crash as fears grew that commercial real estate would be the next shoe to drop.
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