Higher Rates And Tighter Credit Are Weighing On The Commercial Real Estate Market

The commercial real estate industry is showing indications of weakness, as seen by the challenges encountered by two of the market's top participants as interest rates rise and financial conditions tighten. 

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Blackstone, the world's largest owner of commercial real estate, suffered a significant drop in distributable earnings last year as demand for commercial real estate holdings slowed. According to the asset manager's most recent financials, income from asset sales decreased 54% to $4.4 billion in the previous quarter, down from $9.5 billion in the first quarter of last year. 

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Meanwhile, according to Trade Algo, another real estate behemoth, Brookfield Corporation, has defaulted on $161 million in commercial real estate debt connected to office assets. Brookfield had already defaulted on $784 million in commercial real estate debt secured by two large office skyscrapers in Los Angeles in February. 

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The troubles of two of the top real estate corporations portray a picture of a market under strain from a year of increasing interest rates and a recent credit crisis caused by tougher lending criteria imposed by banks following the March turbulence. 

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Meanwhile, commercial property owners are refinancing aging commercial mortgages at rates that are significantly higher than when they originated a few years ago. 

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Tighter lending among small and mid-sized regional banks, which finance around 80% of all commercial real estate loans, has worsened the consequences. Around $1.5 trillion in commercial mortgage debt is approaching maturity and will need to be refinanced in the coming years. 

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While office demand has slowed as work-from-home trends continue, other segments of the industry are also exhibiting indications of strain. According to CoStar Group data, apartment building sales recently experienced their greatest decrease since 2009.

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Some analysts have predicted a commercial real estate market catastrophe similar to the 2008 crisis. Morgan Stanley predicted earlier this month that commercial property values might fall by 40% from their high. 

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