Washington Watch: There is going to be a ‘real mess’ in commercial real estate, but maybe not a financial disaster, economists says

by | Mar 27, 2023 | Stock Market

The commercial real-estate sector is headed for a “real mess” but not necessarily a financial disaster, a leading economist said Monday. “I expect a major correction in commercial real estate is already under way,” said Adam Posen, president of the Peterson Institute for International Economics.

The cause is not complicated. Office occupancy is “lastingly” down 30%-40% since the pandemic, he said. Even thought the problem is relatively simple, the whole industry still seems like it is frozen in place. “We haven’t seen smooth repricing or terribly transparent repricing of the mortgages and commercial real estate lending that is held in nonbank financial intermediaries,” Posen said. A disproportionately large share of the lending in commercial real estate went through so-called “shadow banks.” This may be less bad for the entire economy because these private equity lenders aren’t banks. But at the same time everything is opaque. The sector isn’t regulated. City municipal tax revenues may be hit hard because they are based on rental rates. “Is it a financial disaster? I hope not. I don’t expect so,” he said. But it could have a negative effect on wealth and city budgets to the real economy, Posen said.

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