The U.S. economy is on the road to recovery, but a significant challenge looms large in the form of commercial real estate. Approximately $1.5 trillion worth of commercial real estate loans are set to mature over the next two years, a massive increase that could stifle development and construction in major cities struggling to recover from the pandemic, according to a recent opinion piece in MarketWatch by John F. Fish, the chairman & CEO of Suffolk and chair of The Real Estate Roundtable’s Board of Directors. With interest rates rising and real estate values decreasing, borrowers may find it difficult to keep up with loan payments, leading to an economic calamity for the broader economy, as well.
To avoid this potential disaster, the Federal Reserve and financial regulatory agencies must grant more time for borrowers to restructure their loans. This approach has proven successful in previous financial crises, and the Board of Governors at the Fed proposed a similar policy in the summer of 2022. Giving borrowers additional time to adjust to the economic climate makes more sense than pushing loans that could result in more foreclosures and bankruptcies.
It is important to note that the majority of commercial real estate loans were secured at a time when interest rates were extremely low, well below the current rate of approximately 5 percent. As a result, borrowers are now facing higher interest payments, which are compounded by a decrease in real estate values. This is particularly evident in cities that have been hit hard by high vacancy rates due to remote work policies. Before the pandemic, 95 percent of U.S. offices were occupied, but that number has plummeted to around 47 percent today. According to the article, this significant drop has resulted in a loss of $453 billion in commercial real estate value, according to the U.S. National Bureau of Economic Research (NBER).
Without intervention, developers will be forced to halt or delay construction in cities, including projects to revitalize vacated downtowns. More than 70 percent of municipal taxes come from property taxes, and a sustained lack of activity in U.S. cities will further diminish the vibrancy of businesses that rely on foot traffic from offices and residents.
While the author is not calling for a bailout, he stresses an unpredictable set of circumstances, from workers staying at home during the pandemic, to a decade of near-zero interest rates, massive spending and nine consecutive interest rate hikes have created a setting where defaults on commercial real estate loans hit a 14-year high in February of 2023. Leaders at the local and state level are taking incremental steps, but without action from Washington, the situation could be dire not only for lenders and property owners but also for jobs in the construction industry, which may come to a halt.
Allowing additional time for markets to stabilize has worked in the past and can again. Time will allow borrowers to emerge from the pandemic and work through these challenges, so the public doesn’t end up bearing the cost. Inaction is not an option, as failure to act will hurt consumers, businesses, and the economy at large, Fish concludes.