Commercial real estate in trouble. What to look out for?

In the rhythm of decades-long aspirational growth, fueled by low interest rates and affordable credit, U.S. commercial real estate (CR) is facing serious challenges. Valuations of office and retail properties have been declining since the start of the pandemic due to declining employment and changes in the way people work and shop. The Federal Reserve's attempts to fight inflation by raising interest rates are also hitting the industry's creditworthiness. Recent banking difficulties are more likely to exacerbate these problems.

Lending for commercial real estate developers and managers is primarily through small and medium-sized banks, where liquidity pressures have been most severe.'''According to economists at Goldman Sachs, about 80% of all bank loans for commercial real estate are made by regional banks. Recently, short sellers have stepped up bids against commercial landlords, indicating that they believe the market will continue to decline as regional banks restrict access to credit.

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T Real estate is the most targeted buyout globally and third in the U.S., according to S&P Global. So how serious is this threat to the economy? In an interview with Before the Bell, we spoke with Khander Snyder, senior commercial real estate economist at First American, to find out. This interview has been edited for clarity and brevity.

Before the Bell: Why Investors''s important to pay attention to the commercial real estate situation right now?

Hander Snyder: Banks have a lot of assets in commercial real estate. That affects the stability of the banking system. So the state of the market affects the whole economy, even if you're not interested in commercial real estate per se. How bad are things right now? Price growth is slowing down, and for some asset classes it's starting to decline. Office space has been in a more difficult situation, for obvious reasons. Now private lending to the industry is also starting to slow down - bank lending started drying up long before the Silicon Valley Bank case. Loans have become rare for all commercial real estate, and additional''we're offering you an undervalued price'. These situations have happened before and this pricing gap has led to a reduction in deal activity. There is no broad agreement on asset valuations. Economic uncertainty will only exacerbate this trend. And if you're a bank, it's much harder to make a loan when you don't know the actual value of the building.

How much do we need to worry?

Many people hear about commercial real estate and assume that everything is the same and trends are the same in all sectors, but that's not true.