According to a recent article by Business Insider, the commercial real estate market is set for some difficulties in the near future, with there being a risk for a significant downturn. This is due to two primary factors: relatively high interest rates, and low commercial property values. As a result, many current commercial real estate owners are dealing with negative equity on their properties, putting some at risk of default.
Commercial Real Estate Market Faces Troubles
The commercial real estate market is facing significant troubles in the near future, thanks to issues that have been hindering the market for some time. An increased emphasis on working from home since the COVID pandemic has left many office owners with property they barely use, and there are few people looking to buy up those properties. This has left many banks holding mortgages for commercial properties that its owners may not be able to reasonably pay back, making them more nervous about lending out for commercial properties.
High Interest Rates Scare Away Buyers
One major issue that has particularly impacted commercial real estate are the relatively high interest rates, which have gradually risen over the past couple of years thanks to an aggressive anti-inflationary policy from the Federal Reserve. While not anywhere near historic highs, these interest rates are sometimes more than double what current owners paid for their mortgages even a few years ago. This, in turn, has made prospective buyers anxious, since they may balk at purchasing property for such high interest rates.
Low Property Values Burden Current Owners
Meanwhile, current commercial real estate owners are dealing with the problem of relatively low property values. The impact of COVID, along with other factors, has resulted in the value of commercial properties plummeting over the past few years, with many commercial property owners now holding mortgages that have more money left to pay back than the property itself is worth. This is known as having “negative equity,” and it poses a significant risk to the market.
Negative Equity Increases Risk of Default
It is estimated that, due to the above factors, around 14% of all mortgages, and 44% of all office mortgages, are currently dealing with negative equity. This means that many current commercial real estate owners are dealing with properties that are no longer worth what they owe on their mortgages, placing as much as 10-20% of all commercial real estate loans at risk of default. This may change, however, if property values start to rise again, or if interest rates start to fall to previous levels.
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