Real estate investors brace for fresh storm

LONDON/SYDNEY — Commercial real estate investors and lenders are slowly confronting an ugly question: If people never again shop in malls or work in offices the way they did before the pandemic, how safe are the fortunes they piled into bricks and mortar?

Rising interest rates, stubborn inflation and squally economic conditions are familiar foes to seasoned commercial property buyers, who typically ride out storms waiting for rental demand to rally and the cost of borrowing to fall.

Cyclical downturns rarely prompt fire sales, so long as lenders are confident that investors can repay their loan and the value of the asset remains above the debt lent against it.

This time though, analysts, academics and investors interviewed by Reuters warn things could be different.

With remote working now routine for many office-based companies and consumers habitually shopping online, cities such as London, Los Angeles and New York are bloated with buildings that local populations no longer want or need.

'No longer necessary'

"Employers are beginning to appreciate that building giant facilities to warehouse their people is no longer necessary," said Richard Murphy, political economist and professor of accounting practice at the University of Sheffield in England.

"Commercial landlords should be worried. Investors in them would be wise to quit now," he said.

Global lenders to US industrial and office real estate investment trusts said companies in the sector were now 17.9 percent more likely to default on debt than they estimated six months ago.

"Deposit flight can happen any day," said Jeffrey Sherman, deputy chief investment officer at the US investment house DoubleLine, pointing to the migration of customer deposits from banks to higher-yielding "risk-free" money market funds and Treasury bonds.

"As long as the Fed keeps rates high, it's a ticking time bomb."

Charles-Henry Monchau, chief investment officer at Bank Syz, likened the impact of aggressive rate tightening to dynamite fishing.

"Usually the small fishes come to the surface first, then the big ones — the whales — come last.

"Was Credit Suisse the whale? Was SVB the whale? We'll only know afterwards. But the whale could be commercial real estate in the US."

Agencies Via Xinhua