USRT - Commercial Real Estate Under Pressure
2023-04-25 02:45:00 ET
Summary
- Is the real estate market on the verge of another major downturn? The answer is it’s different.
- In the United States, commercial real estate vacancy rates have increased from 12.5% at the beginning of 2019 to over 20% in the second quarter of 2023.
- Many of the builders and owners of these properties borrowed money at a time when the Federal Reserve had interest rates at zero.
By Erik Norland
At a glance
- Tighter lending and reduced loan demand are a few of the challenges facing the U.S. commercial real estate sector.
- Commercial real estate vacancy rates in the United States have increased from 12.5% at the beginning of 2019 to over 20% in the second quarter of 2023.
Is the real estate market on the verge of another major downturn? The answer is it’s different. In 2008, the global financial crisis was closely associated with a tremendous decline in the value of residential real estate, and in particular, residential real estate associated with subprime loans in the United States. However, the challenges with the real estate sector today are very different; they are now on the commercial side.
In the United States, commercial real estate vacancy rates have increased from 12.5% at the beginning of 2019 to over 20% in the second quarter of 2023. This can provoke a major downturn in price, especially given that there’s a tremendous amount of leverage in this sector.
Many of the builders and owners of these properties borrowed money at a time when the Federal Reserve had interest rates at zero. Fed fund rates are now at nearly 5%, so not only are vacancy rates up, but so is the cost of financing.
The same thing is true in many markets on the other side of the Atlantic. In central London, office vacancy rates have risen from 4.3% to 8.6%, doubling in less than three years. And all of this is happening at a time that the Bank of England has increased its rates from 0% to over 4%.
With housing vacancy rates in the United States at near record lows, the epicenter of any real estate downturn this time around might be centered in commercial and not residential.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Commercial Real Estate Under Pressure