Faced with potential disaster, the U.S. commercial real estate sector is teetering on the edge of a precipice.

Watch out for a potential catastrophic event in U.S. commercial real estate

Real estate experts are warning of a looming financial disaster in America's long-lived commercial real estate sector that could happen as early as next year. Markets have been concerned about commercial real estate since early 2023, when the collapse of Silicon Valley Bank sparked fears over the sector's $1.5 trillion in debt that is approaching maturity. A recent estimate by Capital Economics found that office prices are unlikely to continue falling by 20% in 2024, and attributed this to weak growth and still-high interest rates. The firm predicted a 43% decline in the U.S. office market, warning that it will take two decades or more for real estate values to return to their peak in the early 2020s.

According to a recent National Economic Bureau working paper, banks could lose about $160 billion from commercial real estate, about a quarter of the average lender's funds. Other market observers, such as hedge fund analyst Kyle Bass, predict losses as high as $250 billion.

It is also indicated that already around 14% of all commercial properties are already 'negative equity', meaning that the value of the building is less than the remaining loan amount, and 10-20% of all commercial properties may not be repaid. Late payments on commercial real estate loans have already started to increase, with default rates on office loans reaching 5% this year, according to data provider Trepp. Meanwhile, total commercial real estate loans increased by $37 billion last quarter, according to a report from the Morganji Banking Association, largely due to accrued interest on outstanding loans.

Office buildings may soon be abandoned due to the ongoing trend of working from home, according to a recent Treasury Department document that indicates some commercial properties may face the same fate as "zombie" malls during the pandemic. Some malls were later converted into warehouses, distribution centers or mixed-use spaces. More creative conversions included a cricket stadium, a police station and a cannabis farm. The paper says, "There are clear parallels between today's commercial real estate office sector and regional shopping centers before their decline, and there is growing evidence that the commercial real estate sector may face a similar downturn."