We’re in the midst of a sharp downturn in commercial real estate construction

Multifamily—which is working through a large pandemic era pipeline—is in the early stages of its downshift pic.twitter.com/CDWLL5rxPO

— Lance Lambert (@NewsLambert) June 20, 2024

🏢📉 CRE CLO distress rate hits 9.74% in May, up 114 bps! 📊 Over 36.5% on watchlists. 🤔 What’s your take? #RealEstate pic.twitter.com/ILY3DYO5fB

— Daniel Kaufman (@DanielKaufmanRe) June 19, 2024

The commercial real estate sector is currently facing significant challenges. Here are some key points to consider:

• Oversupply of Office Space: Major cities like Los Angeles, San Francisco, and New York are experiencing an oversupply of office space. The rise of remote work and the “quiet quitting” trend have complicated matters, leading to vacant office spaces.
• High Interest Rates: The Federal Reserve’s higher interest rates are likely to contribute to a dry-up of credit and debt. Borrowing becomes expensive, making it difficult for many to take out loans for real estate projects¹.
• Regional Banks and Asset Values: Smaller regional banks issue most U.S. mortgages. As the Fed raises rates, these banks may face devalued assets due to older mortgage-backed securities and long-term treasuries becoming less marketable compared to newer, higher-interest bonds¹.
• Trouble Ahead in Certain Areas: While a crash in the entire sector is unlikely, there are signs of trouble in specific areas. Fewer buyers may struggle to secure affordable mortgages and development loans, leading to depressed prices in certain regions¹.
• Demand Outstripping Supply: In cities like Los Angeles, San Francisco, and New York, where vacant office space is abundant, demand is not keeping up with supply. However, strong demand in other areas may offset this trend