According to Patrick Carroll, CEO of real estate investment firm Carroll, the commercial real estate market may be headed for a crash. In an interview with CNBC, Carroll predicted that the fallout could be as bad as what was seen during the 2008 financial crisis. He explained that the market is facing a dire situation in the coming years as a significant amount of commercial mortgage debt reaches maturity.
Carroll stated that while some areas of commercial real estate, such as multifamily housing, could remain intact, others like offices and hotels would be “destroyed.” Other industry experts have also warned that the sector is facing tighter credit conditions and a wall of debt maturities. The fall of Silicon Valley Bank has also contributed to the increasing concerns about high levels of commercial mortgage debt held by banks that will need to be refinanced in much tougher conditions in the 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 financed.
Carroll also warned that sellers are not realizing how much their properties have lost value, and they are not willing to sell yet because they have not felt enough pain. As $1.5 trillion in commercial real estate debt comes due in the next three years, Carroll stated that the stress in the market could soon bubble to the surface, and it will need to be refinanced or renegotiated somehow. Morgan Stanley has also warned that commercial estate prices could plunge 40% as tighter financial conditions weigh on the sector.
Bank of America clients 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. With the commercial real estate market showing significant signs of stress, Carroll’s warning highlights the potential for a significant market downturn with implications for the broader economy.