IMF: US Commercial Real Estate Remains a Risk

The US Commercial Real Estate sector remains a risk despite despite investors’ hopes for a soft landing, according to an article by IMF posted last month. According to the Mortgage Bankers Association, some $1.5 Trillion of commercial real estate debt is maturing in the next two years. About one-fourth of this debt is in office and retail sectors. Most of this debt is held by banks and commercial mortgage-based securities. This is indeed a huge risk for the economy as whole. No wonder regional lenders are under tremendous pressure from CRE loans. The following an excerpt from the IMF piece:

The commercial real estate sector has been under intense pressure globally as interest rates have risen over the past couple of years. In the United States, with the largest commercial property market in the world, prices have tumbled by 11 percent since the Federal Reserve started raising interest rates in March 2022, erasing the gains of the preceding two years.

Higher borrowing costs tend to dampen commercial property prices directly by making investments in the sector more expensive, but also indirectly by slowing economic activity and reducing the demand for such properties. Nevertheless, the sharp decline in prices during the current US monetary policy tightening cycle is striking. As the Chart of the Week shows, contrary to the current policy cycle, commercial property prices remained generally stable or saw milder losses during past Fed rate hikes. Some of the earlier rate hikes, though, such as in 2004-06, were subsequently followed by a recession during which commercial property prices recorded notable declines as demand fell.

Source: US Commercial Real Estate Remains a Risk Despite Investor Hopes for Soft Landing, IMF

The recent plunge in New York Community Bancorp, Inc (NYCB) due to CRE loans and other factors is a cautionary tale for investors. Many regional and small lenders are on thin ice holding these loans and any declines in prices will further deteriorate their shaky balance sheets. Hence it is not wise to jump into these stocks at current levels. The following chart shows the dramatic decline in the stock price of NYCB year-to-date:

Source: Google Finance

Disclosure: No positions

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