Commercial real estate prices in the United States may not be as stable as they appear, according to a recent report by the Federal Reserve. The central bank cautions that the recent flatness in transaction-based prices could mask deeper problems within the sector. The report states that “transaction-based prices may not fully reflect conditions” in the commercial real estate market. This warning comes as many property owners face looming refinancing deadlines, with many still needing to secure new loans to pay off maturing debts.
Despite the appearance of stabilization, the Fed underscores that the risk of further value drops remains significant. The report highlights that “forced sales in a thin market could cause significant price declines, including for properties that are not distressed.”
Tight lending standards, reduced property valuations, and higher interest rates than when much of the current debt was originated make this scenario more likely.
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Banks have continued to tighten standards for commercial real estate loans, which could further pressure the sector, it said.
The broader context of the report shows that commercial real estate has already experienced notable declines. The Trepp Property Price Index, cited in industry analysis, indicates that commercial property values have continued to fall, with widespread declines across asset types. The office sector is experiencing the largest year-over-year drop.
While the residential real estate market remains elevated, with price-to-rent ratios at historically high levels and comparisons drawn to the pre-2008 period, the commercial sector’s apparent calm may be misleading. The Fed's assessment suggests that current price indices could understate the true extent of stress in commercial real estate, and the risk of further declines persists as refinancing challenges mount.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
