Commercial real estate drops in value as higher interest rates make borrowing costs higher

All right, let's get to Diana Olex. She's been taking a look at the commercial real estate sector. Diana, what have you found? Well, Becky, I think the best way to do this, it's look just at the basic numbers. But first, most importantly, we have to understand that commercial real estate has dropped in value simply because higher interest rates make borrowing costs higher, thereby limiting investors' ability to make deals. Now, FDIC and short banks hold the largest share of CRE mortgages at 39% or $1.7 trillion. 13% is held in CNBS.

And most is held at regional and community banks. Now, this year and next, there is a huge pipeline of commercial mortgages hitting maturity that need to be refinanced. The big concern, of course, is office. Of the $270 billion of bank-held CRE loans maturing this year, about 80 billion or 30% are on office properties, and that's according to TREP. So property owners who need to refi are up against higher borrowing costs and lower property values. Mark Grant, chief global strategist at Collier Security, says everybody's scaling back their risk appetite for real estate loans. Office owners, in particular, are getting squeezed.

$40 billion worth of these properties are now seen in distress. Now, because of lower property values and, of course, the current bank stress, several experts I've spoken with say dealmaking has essentially ground to a halt, and the CNBS market is largely shut down. A data expert at TREP, Manas Clancy, told me there is no capital out there for offices. Others are less bearish, but Willie Walker of Walker and Dunlop told me if I were in office, I'd be holding my breath. Becky? Yeah, we've heard some concerns. We've spoken with some people in the industry about it recently. And of course, we've all seen some of the big companies like Brookfield and Pemko walk away from some of their buildings and just say, forget it.

I think in LA, downtown, that was one of the first things that kind of caught people's attention. What happens? What's the solution when you've got higher interest rates, lower values? We're going to see a lot more of that. What would the solution possibly be to try and stem it? Well, interestingly, and Manas Clancy of TREP told me this, he said we could see something like what we saw in the retail sector. And that was even before the pandemic, when e-commerce really killed retail. And that is that the property owners just keep paying the interest on the loans. And the banks, because they don't want these assets, kind of put them into CRE purgatory while they refinance the loans or try to figure out what to do. But it just kind of pushes the problem out until potentially interest rates come down or property values go up, because they don't want to foreclose on these properties.

They don't want to be left in the act with the assets. So like retail, he says that's going to be the big story going forward, is to see if they hold these loans and just keep paying them, which is a large possibility. That's interesting.

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