Darius recently sat down with Nick Halaris to explore the current state of US commercial real estate.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. A Commercial Real Estate Disaster May Be On The Horizon

Over the past couple of years, there has been a confluence of factors that have negatively impacted the real estate sector:

  • The rise of interest rates
  • The blow-up in Crypto
  • The increase in layoffs at tech companies
  • Office space occupancies leveling off at 50%
  • The regional banking crisis

As a result, US commercial property prices are back down to pre-covid levels. Although they have declined substantially since the COVID-19 blow-off top, they will likely decline even further.


 

2. Commercial Real Estate Distress Levels Are On The Rise… Albeit Slowly

Distress levels in US commercial real estate have been accelerating since mid-2020 but are not yet at levels seen in the Great Financial Crisis because:

  • Banks learned from the Great Financial Crisis that the rapid withdrawal of liquidity from real estate would hurt them, so they are more patient with borrowers and more lenient with covenants.
  • The “Goldilocks” economy continues to be resilient, supporting the real estate sector.

3. Commercial Real Estate Investment Volume Is Drying Up

Investment volume is down significantly YoY across commercial real estate:

  • Multifamily: -70%
  • Industrial: -48%
  • Office: -63%
  • Retail: -65%

Sellers are hesitant to sell because they expect inflation will increase again, increasing the value of their properties back to 2022 levels.

Buyers are hesitant to buy because their existing exposure is declining in value and interest rates are pricing them out of further investment.

Transactions are sparse as a result. The waiting game continues….

That’s a wrap! 

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