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US commercial-property concerns keep mounting - experts warn of 'massive' debt refinancing risk and an economic 'doom loop'

NY buildings
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  • Concerns about the US commercial-property market are mounting as experts warn of worse times ahead.

  • Mohamed El-Erian has warned of looming "massive" debt refinancings, while others see the risk of an economic "doom loop."

  • Here is a selection of the latest expert warnings about the US commercial real-estate market.

Concerns about the US commercial real-estate (CRE) industry are mounting as office vacancy rates hit all-time highs, consumer savings dwindle, and interest rates march higher.

Some market experts have warned of a looming economic "doom loop" due to America's collapsing office market, while others have warned of losses for banks thanks to their CRE exposure.

Since the start of this year, the commercial property market has been grappling with multiple challenges including a steep surge in high interest rates, work-from-home trends, and a credit squeeze that followed the banking turmoil of the first half.

Here's a selection of the latest expert warnings about CRE and its implications on consumers, businesses, and the broader economy.

'Massive' refinancing needs

Top economist Mohamed El-Erian has warned the sector faces further pain, with the industry facing "massive" debt refinancings at a time when interest rates are at their highest level since 2001.

"If you look at high yield, if you look at commercial real estate, there's massive refinancing needs next year. Massive," the chief economic adviser at Allianz said during a recent Bloomberg interview.

"So that's the point of pain which starts to happen," he added.

"There are things that have to be refinanced in this economy that cannot be refinanced in an orderly fashion at these rates," El-Erian continued.

A $250 billion loss

In a grave warning, hedge fund founder Kyle Bass estimated that US banks could lose up to $250 billion on their exposure to commercial offices, which makes up about 10% of their combined $2 trillion in equity.

"It's obvious that office is having enormous difficulties," Bass told Bloomberg.

But other areas of the commercial property industry should stay solid, including industrial real estate, multifamily housing, and data center spaces, Bass said.

"When you're looking at industrial, it's still performing incredibly well despite the rate hikes. If you look at data centers, you can't build enough data centers today. I think the AI revolution is causing a giant push for new data centers. When you look at multifamily, multifamily is doing really well," he added.

Economic 'doom loop'

On a broader scale, CRE troubles not only pose microeconomic threats but risk damage to some of America's largest cities.

Stijn Van Nieuwerburgh, a real estate and finance professor at the Columbia School of Business, has warned cities could be teetering on the edge of an economic "doom loop" thanks to a crashing office property market.

"The problem that smaller cities have is that, often, there's not a whole lot of other things that cities have to offer in their downtown areas besides the commercial office district. So when that office district starts to falter, it sort of affects the entire city," he said.

Read the original article on Business Insider