![]() ![]() Newer office builds, particularly those built after 2010, are seeing much stronger net absorption rates than older builds. Difficulties are emerging by geography-Chicago and San Francisco are much more challenged than Miami, Raleigh and Columbus, for example-and differentially affecting property vintages. ![]() Investors need to remember, however, that the office sector is bifurcated. Office vacancies rose when the pandemic hit, and have kept rising since Office sales volume is now approaching its post-GFC lows. Today, as shown in the chart below, the office vacancy rate of 12.5% is comparable to where it was in 2010, one year out from the global financial crisis (GFC). Vacancies soared in the early stages of the pandemic and have kept rising since. Make no mistake: Rising rates are piling pressure on the troubled office sector. Worsening conditions challenge the office sector But it’s difficult to quantify this risk precisely, and the uncertainty surrounding potential offsets is high. That said, the small bank lending channel more generally does represent a macro risk, as tighter lending standards and profitability challenges in the banking sector could reduce available financing and raise the cost for small and medium sized businesses. From both a GDP and wealth perspective, the office sector represents a small part of the overall economy. Nor do we believe that potential losses within the office sector are likely to destabilize regional banks. Many other sectors within CRE have stronger fundamentals. Here’s our main takeaway: The office sector faces its own particular set of challenges. Reshoring-the process of bringing production and manufacturing of domestic goods back into their country of origin-could also benefit the industrial sector. Other trends, such as the rise of e-commerce, continue to provide tailwinds for industrial assets, including logistics properties and warehouses. Some of those shifts, such as the widespread adoption of hybrid work patterns post COVID-19, are still creating powerful headwinds for the office sector, which is particularly-although not uniformly-vulnerable. Just how worried should you be? To help cut through the noise, we delve into commercial real estate to explain ongoing industry trends and how we expect them to impact different subsectors in the quarters and months ahead. 1 More worrying, a significant percentage of those loans will require refinancing in the coming years, exacerbating difficulties for borrowers in a rising rate environment. Within that cohort of small banks, CRE loans make up 28.7% of assets, compared with only 6.5% at big banks. Compared to big banks, small banks hold 4.4 times more exposure to U.S. markets, investors have begun voicing concerns about the balance sheet vulnerabilities of regional banks - and more specifically, their exposure to commercial real estate (CRE). banks, Silicon Valley Bank and Signature Bank, rocked U.S. ![]() Since March, when the abrupt and unexpected failure of two regional U.S. Renewed stress in the banking industry has a way of focusing the mind. ![]()
0 Comments
Leave a Reply. |