Problems in the commercial real estate sector could reignite the banking crisis and stall the economy

Challenges in commercial real estate also threaten to hit the banking sector and the US economy as a whole. REUTERS/Lucas Jackson

• A Columbia professor has given a bleak outlook for commercial real estate in the US.
• Office values ​​are falling and threatening to trigger an “urban doom loop”, said Stijn Van Nieuwerburgh.
• The sector’s challenges could spill over into the banking sector and hurt the broader economy, he said.

The commercial real estate crisis (CRE) is just beginning and the fallout could impact the banking sector and the broader US economy, a leading academic has warned.

Stijn Van Nieuwerburgh, professor of real estate and finance at Columbia Business School, sounded the alarm about an “urban doom loop” for CRE in a recent RealVision interview.

He explained that rising interest rates and the shift to remote work have lowered the value of office space in cities. He anticipates that this will lead to lower property tax revenues and that budget deficits will force city officials to raise taxes or spend less on education, transportation, sanitation and other public services. If cities became more expensive and less attractive, people would likely move away, further reducing property values ​​and setting off a downward spiral, he said.

“We are in the early stages of this vicious circle,” said Van Nieuwerburgh, noting that his calculations suggest property values ​​will continue to fall.

The professor pointed to data that suggests office occupancy, rental income and the number of new leases signed remain well below pre-pandemic levels. Vacancy rates have also risen to their highest level in about four decades, he noted.

“We haven’t seen a crash like this since at least the early 1980s,” he said, adding that low-quality offices could depreciate by as much as 45% over time, and the office sector as a whole will suffer a $500 billion decline in value -Dollar.

Van Nieuwerburgh stressed that many Americans were affected by this slump. Pension funds, real estate investment trusts (REITs) and other companies have invested significant sums in commercial real estate, particularly in the office segment.

He also stressed that regional banks are important sources of financing for commercial real estate, meaning they could face the same problems that toppled Silicon Valley Bank and Signature Bank earlier this year.

“I’m concerned that there is a risk of contagion and that we haven’t seen the end of the banking crisis yet,” said Van Nieuwerburgh. He warned that if smaller banks suffer losses in their CRE portfolios, they could pull back their lending to small businesses, which could slow economic growth.

“The worst-case scenario is a pretty bad event,” he said. “The most likely scenario is a slow-burn scenario, a train wreck in slow motion, where banks have to reserve or lose money for several years.”

“It will not be positive for the economy, we will see a slight credit crunch,” he added. “That’s the best-case scenario.”

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