‘Perfect storm’ from high interest rates and credit crunch threatens commercial real estate, construction and jobs -Dlight News

'Perfect storm' from high interest rates and credit crunch threatens commercial real estate, construction and jobs

“Tighter credit conditions and loans refinanced at high, unsustainable rates could potentially stifle construction and development. As the U.S. emerges from the Covid-19 pandemic, rising inflation and interest rate hikes to combat them will be the focus of attention. But there’s another threat with equally impressive and far-reaching implications for consumers and the economy: commercial real estate. About $1.5 trillion worth of commercial real estate loans are due to mature over the next two years, increasing sharply. Compounding the refinanced loans at rates could potentially stifle construction and development in major cities struggling to recover from the pandemic. To avoid imposing more far-reaching economic uncertainty, the Federal Reserve and financial services regulatory agencies have restricted commercial real estate loans to borrowers — including corporate real estate developers. More time should be given for restructuring. This strategy has a proven track record of success. During the 2008-09 financial crisis and again during the Covid-19 pandemic, similar programs provided flexibility to financial institutions to work constructively with borrowers. In the summer of 2022, the Fed’s Board of Governors proposed a comparable policy. Giving borrowers more time to adjust to the economic climate makes more sense than pushing loans that could lead to more foreclosures and bankruptcies. Failure to act will hurt more than just these loan holders. The perfect storm of high interest rates, low real estate values ​​and a disorganized market will burden consumers, businesses, prevent affordable housing expansion and further damage the health of our major metropolitan areas. “Most commercial real estate loans were financed when base rates were near zero.” Consider that most commercial real estate loans were made when base rates were close to zero—closer to 5% than today’s rates. Not only are rates high, but real estate values ​​are also very low, especially in cities with high vacancy rates due to ongoing work-from-home policies. Before the pandemic, 95% of US offices were occupied. Today, that number is closer to 47%. According to the US National Bureau of Economic Research (NBER), the drop wiped out $453 billion in commercial real-estate value. The extra time will provide several benefits as inflation and interest rates moderate. It will allow businesses to recover more from the pandemic, pressure-test how many workers will permanently work remotely, and allow the cost of materials and labor to fall further from their post-pandemic heights. By comparison, office occupancy rates in Europe and the Middle East have already rebounded to 70% or more. Without intervention, developers will be forced to halt or delay construction in cities, including projects to revitalize vacant downtowns. “Without a healthy market, developers will be forced to seek tax breaks, resulting in lower revenues for the city budget. Over 70% of municipal taxes come from property taxes. Without a healthy market, developers would be forced to seek tax-exemptions, resulting in less savings for city budgets and fewer resources for public schools, law enforcement, public transportation and other municipal services. The continued lack of activity in US cities will further reduce the vibrancy of businesses that rely on foot traffic from offices and residents – from restaurants, retail stores and more. Inaction on the part of Washington will cost jobs. By creating a downward spiral, construction projects are likely to freeze, threatening the jobs of those in an industry that has experienced its largest monthly decline in job openings over a two-decade period. Fortunately, leaders at the local and state level are taking additional steps in recognition of the growing crisis. For example, New York Governor Kathy Hochul is pushing for policies allowing the conversion of vacant office space into housing. New York City Mayor Eric Adams has called on Wall Street to force workers back into the office. Washington DC Mayor Muriel Bowser has pushed a similar theme for federal government workers in her city, where the government and its 200,000 jobs occupy one-third of all office space. Read: Commercial real estate prices could fall 40%, rivaling 2008 financial crisis: Morgan Stanley Also: The Fed could ‘accidentally’ cut 20% from the S&P 500, warns stock market strategist David Rosenberg. Here are 3 ways to protect your money. “The fiscal and monetary policy imposed by the federal government during the pandemic created this confusion. “This is not a call for a bailout, but for the recognition that fiscal and monetary policy imposed by the federal government during the pandemic has created this dilemma. The federal government strongly encouraged workers to stay home during the pandemic, which reduced demand for office space. Also, a decade of zero interest-rates and cheap money ended with $6.5 trillion in federal spending and nine consecutive interest-rate hikes in a 12-month period. This is an unprecedented, rapid series of events that no one could have predicted. Now the federal government faces more losses. Avoidance should play a role. Defaults on commercial real estate loans hit a 14-year high in February. Giving markets extra time to stabilize has worked in the past and could again. Time allowed borrowers to recover from the pandemic and work through these challenges. John F. Fish is chairman and CEO of Suffolk and chairman of the board of directors of The Real Estate Roundtable. More: The debt machine of commercial real estate is broken Plus: Banks are overwhelmed with bad loans on commercial property, says Charlie Munger: Report

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