US Commercial Real Estate Poses Continued Risks Amid Economic Slowdown

The global commercial real estate sector is facing significant challenges due to rising interest rates, particularly in the United States, home to the largest commercial property market.

Since the Federal Reserve began raising interest rates in March 2022, US commercial property prices have dropped by 11%, erasing gains from the previous two years. This decline is more pronounced than in past rate-hike cycles, and factors such as rapid monetary policy tightening, increased mortgage rates, and reduced private equity fundraising contribute to the sharp drop. Challenges are further compounded by pandemic-induced trends like teleworking and e-commerce, reducing demand for office and retail spaces.

With approximately $1.2 trillion of US commercial real estate debt maturing in the next two years, concerns about asset quality risks, especially for smaller banks heavily exposed to the sector, arise. Financial supervisors must stay vigilant to mitigate potential risks to macro-financial stability amid rising delinquencies and defaults.

Source: IMF