Analysis: Commercial real estate investors risk painful losses in post-COVID world

Analysis: Commercial real estate investors risk painful losses in post-COVID world

Investors and lenders in commercial real estate are facing a concerning question: if consumer behavior and work patterns have permanently changed due to the pandemic, what is the safety of their investments in physical properties? While experienced buyers in the commercial property market are accustomed to dealing with challenges such as rising interest rates and economic fluctuations, this time may be different. Analysts and experts warn that the shift towards remote work and online shopping has led to an oversupply of office spaces and malls in cities like London, Los Angeles, and New York. As a result, the recovery of property values may take longer, and landlords and lenders could face significant losses if tenants cannot be found.

Richard Murphy, a political economist and professor, believes that employers are realizing that large office spaces are no longer necessary. He advises commercial landlords to be concerned, and investors to consider exiting their investments. The issue of commercial real estate debt is also a cause for worry. Moody’s Investors Service reported that global banks hold approximately half of the $6 trillion outstanding commercial real estate debt, with a significant portion maturing between 2023 and 2026. U.S. banks have already experienced losses from property investments in their first-half figures and have warned of more to come. Global lenders have also expressed concerns about the increased likelihood of default by firms in the industrial and office real estate sector.

Jeffrey Sherman, deputy chief investment officer at DoubleLine, highlights the potential risk of deposit flight from banks due to the migration of customer deposits to higher-yielding investments. He believes that as long as interest rates remain high, there is a ticking time bomb in the commercial real estate market. However, some policymakers remain confident that the shift in work patterns will not lead to a credit crisis similar to the one in 2008-2009. Demand for loans from euro zone companies has reached a record low, and U.S. Federal Reserve stress tests indicate a lower projected loan loss rate in 2023 compared to 2022.

While average UK commercial property values have already fallen by around 20% without causing major loan impairments, Charles-Henry Monchau, Chief Investment Officer at Bank Syz, compares the impact of aggressive rate tightening to dynamite fishing. He suggests that smaller issues may arise first, followed by larger ones, such as commercial real estate in the U.S.

The pandemic has also led to a decline in prime office rental growth in major cities worldwide. Businesses are under pressure to reduce their carbon footprint, leading to a decrease in office space demand. Retrofitting over 1 billion square meters of office space globally by 2050 is necessary to meet net-zero targets. Some investors, like Australia’s largest pension fund AustralianSuper, have suspended new investments in unlisted office and retail assets due to poor returns. Short-sellers are also targeting listed property landlords, anticipating a decline in stock prices.

Capital Economics predicts lower property returns in the coming decade compared to pre-pandemic levels. They suggest that investors must be willing to accept a lower property risk premium, as property may appear overvalued by past standards.

In conclusion, the commercial real estate market is facing significant challenges due to the changing behavior of consumers and workers. Investors and lenders must carefully consider the potential risks and adjust their strategies accordingly.

About News Team

Hi, I'm Alex Perez, an experienced writer with a focus on lifestyle and culture news. From food and fashion to travel and entertainment, I love exploring the latest trends and sharing my insights with readers. I also have a strong interest in world news and business, and enjoy covering breaking stories and events.

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