John Rubino: The Commercial Real Estate Bust Isn’t Coming. It’s Here

Following a 70 percent average rise between 2014 and 2021, commercial property prices have started to level out. That’s due to a number of factors.

The largest? An increase in hybrid and remote workers. That’s keeping demand subdued. And many companies will likely scale back their office size when it’s time to renew their lease. However, the recent rise of inflation has taken its toll, as interest rates have jumped.

Consequently, commercial real estate faces the two major headwinds of higher financing costs, and a lower demand trend for years to come.

This trend is just getting underway. A number of companies looking to sell commercial properties have had to either pull the listing or lower prices substantially.

For instance, Wells Fargo (WFC) tried to sell one of its properties for $160 million in 2022. It pulled the listing, and has relisted this year for $53 million. That’s a 67 percent drop in only a year. And it’s still for sale.

Unlike housing, commercial mortgages reset every few years. With prevailing interest rates much higher now, the costs of carrying a building with lower rental demand could prove devastating for the space. And it may impact the balance sheets of the often small and regional banks that service these loans.

Ultimately, this could have a widespread impact on the overall economy, and weigh on growth for some time.

To read the full analysis, click here.