Low interest rates and rosy assumptions about how much rental properties could be raised fueled the record $ 5 trillion boom in US commercial real estate over the past decade.
However, as the COVID-19 pandemic threatens to rewrite many rules about where people work, shop and spend their free time, the big question remains: what could all this mean for commercial real estate?
"We believe Commercial Real Estate (CRE) is high on the list of sectors at greatest risk of asset quality deterioration due to the coronavirus pandemic – which would result in losses for US banks "A team of analysts led by S&P Global Stuart Plesser of Rating wrote in a new report on Monday.
While the Plesser team expected that most banks without strong engagement could easily sustain their projected 3% "base case" loss in commercial real estate, they also warned that loss rates could reach 10% or more, which is "far more significant “Would mean for the banking sector, which would likely lead to downgrades for many banks. "
The following graph shows that banks own about half of the US commercial real estate debt:
Who Owns $ 5 Trillion in CRE Debt?
S&P Global, Fed data
In connection with this, the Federal Reserve expects lenders to suffer an average loss of 6.3% in its 2020 stress tests in a "highly adverse scenario" for all bank-held loans, including credit cards, auto loans and corporate loans.
That would represent a combined loss of $ 430 billion over a nine-quarter outlook, but the Fed also said the losses could reach 10.2% if the economic recovery ends up being rockier.
"If the loss rates reached these levels, the smaller banks with higher exposure would undoubtedly experience significant pain," wrote the Plesser team at S&P Global.
In addition, S&P believes the pandemic could remodel parts of commercial real estate in ways that the Fed's stress tests couldn't foresee, even as companies adopt more “liberal work-from-home” policies that reduce demand for Office space could decrease.
See: Office space is a "big question," says this commercial real estate veteran
And while retail and housing are known to have been badly hit, a full picture of the economic impact of the worst public health crisis in a century is far from being known, especially since COVID-19 cases set alarming new records in November .
Check out: Not again! The economy faces another tough test due to the record increase in coronaviruses
In the difficult Taubman Centers shopping malls
agreed over the weekend a lower price for the merger with the Simon Property Group
Dodging a potentially heated litigation during the vacation.
connected: Simon Property gives up four shopping centers. Why could others follow
However, analysts at BofA Global also indicated that distressed sales only accounted for around 1% to 2% of total commercial real estate transactions completed in the second and third quarters.
"Until distressed asset sales increase significantly, we expect asset pricing metrics to remain fairly idiosyncratic," the BofA team wrote in a weekly report.
Until then, according to S&P Plesser, it may be wise to keep an eye on trading in Real Estate Investment Trusts (REITs) stocks.
"In particular, the share prices of publicly traded REITs for most of the CRE subsectors have fallen by around 25%, indicating that investors believe that the CRE market is likely to experience some trouble going forward."
When looking at the major publicly traded funds for commercial real estate, it is the Vanguard Real Estate ETF
ended on Monday at 7% year-to-date or at roughly the same level as the US real estate ETF iShares
according to FactSet data.
The S&P 500 Index
and Dow Jones Industrial Average
Closed on Monday for new records amid more promising developments in COVID-19 vaccines.