**The State of Commercial Real Estate: Forecasts and Assessments from Leading Banks and Firms**
**The Office Sector: A Bleak Future**
A consensus has emerged among big banks, research firms, and advisory firms regarding the state of the commercial real estate sector. Forecasts and assessments range from a price decline worse than the Great Financial Crisis to challenges that are manageable. High interest rates and tightened credit have pushed borrowing costs up and led to a rise in defaults. The office sector is believed to be the most at risk due to the widespread shift to working from home. However, opinions on how this will impact the overall market differ.
**Capital Economics Predicts a Long Recovery for Office Sector**
According to a report from Capital Economics by Kiran Raichura, the office sector is compared to malls, which have not experienced a real recovery. Both sectors lack demand, with offices being negatively impacted by the shift to remote work. Capital Economics forecasts a 35% plunge in office values by the end of 2025, which is unlikely to be recovered even by 2040. This means that office values will not reach their pre-pandemic peaks for the next 17 years. The firm attributes this decline to the low utilization rate of office spaces, as key-card swipes are down to 50% of pre-pandemic levels. This has led to companies reducing their physical space, resulting in a higher vacancy rate.
**Stranded Office Assets and Decreasing Investor Interest**
Capital Economics notes that major landlords have already started returning their stranded office assets to lenders. This trend is likely to increase following a rise in commercial mortgage-backed securities delinquencies in May. Real estate investment trust (REIT) investors are also shying away from office assets. The office REIT total returns index is down more than 50% compared to the all-equity REIT index, similar to the drop seen in the regional mall REIT total returns index during the retail sector’s correction. The road ahead for office owners is expected to be difficult, according to Capital Economics.
**PwC: Commercial Real Estate Opportunities Amid Challenges**
PwC’s midyear outlook states that commercial real estate is not crashing. Despite interest rate hikes and the shift to remote work, the company believes there are still opportunities for deals in all subsectors, including the office subsector. However, transaction volumes were down across all subsectors in the first quarter of this year compared to the same period last year. PwC expects leasing activity and deal flow to return as interest rates and economic policy improve. Nonetheless, the sector will continue to face challenges, forcing dealmakers to be more creative.
**Morgan Stanley Wealth Management’s Concerns for Commercial Real Estate**
Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management, sees a huge hurdle ahead for commercial real estate. She specifically highlights rising vacancy rates and falling property values in the office sector since the pandemic. The entire sector also faces a wave of loan maturities ahead, likely leading to stricter lending standards, increased delinquencies, defaults, and a decline in property values.
**Bank of America: Challenges Are Manageable**
Bank of America analysts suggest that the challenges facing commercial real estate are manageable. They identify two key challenges: high inflation and the shift to remote work. According to the bank, these challenges do not represent a systemic risk to the U.S. economy. They argue that commercial real estate borrowers can employ financing tactics to avoid defaulting on their debt, and improvements in underwriting since the Great Financial Crisis have made loans less risky.
**UBS: Headlines Are Worse Than Reality**
UBS analysts believe that the headlines surrounding commercial real estate are worse than the reality. They state that approximately $1.2 trillion of the outstanding $5.4 trillion in commercial real estate debt is set to mature, likely at higher rates. While this will add to the existing challenges within the office sector, it is not expected to pose a systemic risk. UBS acknowledges that office property owners may be more likely to default on their debt, but this would not have a significant impact on banks.
**Goldman Sachs: The Office Sector Under Scrutiny**
Analysts at Goldman Sachs focus their assessment on the office sector, as it has been the subject of high investor focus in recent months. While multifamily and industrial properties have remained resilient, analysts identify three risks for the office sector. These risks include decreased demand, potential defaults, and a need for restructuring loans.
**Conclusion**
Overall, the commercial real estate sector is facing several challenges, with the office sector being most at risk. Forecasts and assessments vary, with some predicting a long recovery while others believe the challenges are manageable. The future of commercial real estate will depend on factors such as interest rates, economic policy, and the extent to which companies continue to embrace remote work.
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