The onset of severe turmoil in the US office market as investors are told

The overheating U.S. real estate market is foreshadowing an imminent collapse in commercial real estate prices, and the commercial real estate market will face at least nine more months of decline, according to the latest Markets Live Pulse survey by Bloomberg.

The Bloomberg poll

About two-thirds of the 919 respondents surveyed in a Bloomberg poll believe the U.S. office real estate market will recover only after a major collapse. Another majority predicts U.S. commercial real estate prices won't hit a low until the second half of 2024 or later.

This is bad news for the $1.5 trillion in commercial real estate debt that Morgan Stanley estimates should''be repaid by the end of 2025. Refinancing it will not be an easy task, especially since approximately 25% of commercial real estate is made up of office buildings. The Green Street index for commercial real estate prices has already fallen 16% from its peak in March 2022.

The problems of sellers and banks

Commercial real estate prices have been hit hard by the Federal Reserve's aggressive policies that are increasing a key cost of owning real estate - financing costs. However, sellers looking to get rid of their risk are now finding that there are few buyer options because few are convinced the market has bottomed out.

"No one wants to sell at a big loss," said''Leah Overby, an analyst at Barclays Plc, said. "These are properties that don't need to be sold for a long time, which means owners are likely to delay selling as long as they can. "

To add to the difficulties, regional banks, which hold about 30% of office building debt as of 2022, according to a Goldman Sachs report. Smaller banks have seen a 2% drop in deposits over the past 12 months, according to the Federal Reserve, following the collapse of Silicon Valley Bank and Signature Bank. That is cutting funding for banks, reducing their ability to make loans.

The effects of high interest rates

The effects of high interest rates could linger for several years for''owners of U.S.

A study by Moody'\''s Investors Service estimates that leases that are currently in place will expire by 2027, and income expectations will be 10 percent lower than they are today.

Market stability

"For U.S. real estate, interest rate changes are usually slow," said Barclays analyst Leah Overby. "And the office sector is in a deep crisis that will take a long time to''recovery'.

Even if there is a severe and prolonged downturn in the U.S. commercial real estate market, including big losses due to the collapse of the office sector, Leah Overby isn't worried that it threatens the stability of the market as a whole. The real estate sector is large, but the debt is spread widely enough among investors to absorb the losses, she said.

Switching problems

The office sector also has a problem with tenants downsizing or relocating, particularly pronounced in the U.S., where office workers are more skeptical about returning to the office than in Europe or Asia. Some resistance to returning to the office may be related to commuting issues. More than 40% of respondents''Pulse MLIV respondents said they would walk to the office more often if they had access to better public transportation. Faster, more frequent or more accessible public transportation may be particularly appealing to Americans and Canadians. Among the 649 respondents from this region, about half said they currently use a car to get to the office.

About 20 percent of respondents said they moved farther from their office during the pandemic, and only 3 percent regretted their decision. Nearly a third of respondents said their commute became longer than it was before Covid, possibly due to the move or reduced transportation services during the pandemic.