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Forward Guidance
"Credit Shock" In Commercial Real Estate | John Toohig, Victor Calanog, and Thomas LaSalvia
Sep 5, 2023
01:26:50
Snipd AI
John Toohig, Thomas LaSalvia, and Victor Calanog discuss the challenges and opportunities in commercial real estate (CRE) due to the recent interest rate shock. They analyze the decline in CRE prices, the uncertainty in the office sector, low payoff rate in CMBS universe, importance of loan-to-value ratios and cash flow, and hedging interest rate risk. They also discuss the state of the multi-family market and rising insurance costs, along with uncertainties and struggles in investing and banking.
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Quick takeaways
- Commercial real estate prices have declined in various sectors, including office properties (down 31%), industrial warehouses (down 8%), and multifamily buildings (down 20%), since March 2022, coinciding with the Federal Reserve's rate hikes.
- While commercial real estate is facing challenges, the cash flow side remains stable, with multifamily properties experiencing increased rents and office properties maintaining steady revenues and profits.
Deep dives
Commercial Real Estate Market Facing Challenges
The commercial real estate market is experiencing signs of trouble, with declining prices in various sectors. CRE prices have gone down by 16% since March 2022, with office properties down by 31%, industrial warehouses down by 8%, and multifamily (apartment buildings) down by 20%. While income remains stable due to a relatively strong economy, the value of properties is trending downward. The decline started around mid-2022, coinciding with the Federal Reserve's rate hikes. Going forward, there are concerns about commercial real estate loans maturing and the ability of developers to handle the increased interest expense. Market participants are encouraged to have early conversations to prepare for potential challenges and consider strategic sales of underperforming assets.
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