LONDON/SYDNEY- Commercial real estate investors and lenders are slowly confronting an ugly question – if people never again shop in malls or work in offices the way they did before the pandemic, how safe are the fortunes they piled into bricks and mortar?
Rising interest rates, stubborn inflation and squally economic conditions are familiar foes to seasoned commercial property buyers, who typically ride out storms waiting for rental demand to rally and the cost of borrowing to fall.
Cyclical downturns rarely prompt fire sales, so long as lenders are confident the investor can repay their loan and the value of the asset remains above the debt lent against it.
This time though, analysts, academics and investors interviewed by Reuters warn things could be different.
With remote working now routine for many office-based firms and consumers habitually shopping online, cities like London, Los Angeles and New York are bloated with buildings local populations no longer want or need.
That means values of city-center skyscrapers and sprawling malls may take much longer to rebound. And if tenants can’t be found, landlords and lenders risk losses more painful than in previous cycles.
“Employers are beginning to appreciate that building giant facilities to warehouse their people is no longer necessary,” Richard Murphy, political economist and professor of accounting practice at the UK’s Sheffield University, told Reuters.
“Commercial landlords should be worried. Investors in them would be wise to quit now,” he added.
Global banks hold about half of the $6 trillion outstanding commercial real estate debt, Moody’s Investors Service said in June, with the largest share maturing in 2023-2026.
US banks revealed spiralling losses from property in their first half figures and warned of more to come.
Global lenders to US industrial and office real estate investment trusts (REITs), who supplied credit risk assessments to data provider Credit Benchmark in July, said firms in the sector were now 17.9 percent more likely to default on debt than they estimated six months ago. Borrowers in the UK real estate holding & development category were 4 percent more likely to default.
Jeffrey Sherman, deputy chief investment officer at $92 billion US investment house DoubleLine, said some US banks were wary of tying up precious liquidity in commercial property refinancings due in the next two years. – Reuters
