• Morgan Stanley’s chief investment officer is predicting that the commercial real estate sector is facing an economic crash worse than the 2008 financial crisis.
  • The pandemic, high interest rates and the collapse of Silicon Valley Bank have all strained the sector in the last couple of years, with more than $2.4 trillion of debt expected to mature over the next five years.
  • Regional banks holding a significant number of commercial real estate loans in their portfolios are forecasted to face particular turbulence.

A new report from Morgan Stanley is predicting an economic crash worse than the 2008 financial crisis for the commercial real estate sector.

“Commercial real estate, already facing headwinds from a shift to hybrid/remote work, has to refinance more than half of its mortgage debt in the next two years,” Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, wrote in a weekly report published Monday.

Shalett said that the market faces a “huge hurdle,” with analysts forecasting a commercial real estate decline “of as much as 40 percent worse than in the Great Financial Crisis.”

Fears that the sector could be the next domino to fall have continued to grow in the wake of last month’s bank tumult, as many anticipate how climbing interest rates will continue to take their toll on various markets.

Market crash predicted for Commercial Real Estate
A pedestrian walks by a commercial property for lease on October 27, 2022 in San Francisco, California.
Justin Sullivan/Getty

Commercial real estate had already taken a huge hit due to the COVID pandemic. In the spring of 2020, many offices closed as the nation sought to contain the spread of the virus. But even after mandates were lifted and doors reopened, not all workers returned to in-person work, leaving many buildings empty. “Office vacancy rates have moved toward a 20-year high,” Shalett noted.

With work-from-home becoming more commonplace, there has been a “permanent shift” in occupancy rates for the sector, Amiyatosh Purnanandam, an economist and banking risk expert at the University of Michigan, told Newsweek.

High interest rates, which have been implemented in hopes of curbing inflation, have already made it more expensive for people to buy and refinance projects. The Federal Reserve has raised borrowing costs in the highest jump since the 1980s, bringing rates from almost zero to upwards of 4.75 percent in the last year.

The collapse of Silicon Valley Bank in March and the subsequent economic fallout has only further strained the commercial real estate market. Banks are increasingly hesitant to lend out of fears that they could default—and thus be unable to make good on those loans—if depositors rush to withdraw their funds simultaneously.

“Banks that have a significant numbers of commercial real estate loans in their portfolios are facing some turbulence ahead,” Robert Hockett, a financial regulation expert at Cornell University, told Newsweek.

Shalett’s concerns echo those made by Tesla CEO Elon Musk, who tweeted last week that commercial real estate debt is “by far the most serious looming issue.”

His warning came in response to another tweet from the The Kobeissi Letter, a weekly commentary on global capital markets, that stated more than $2.4 trillion of debt in the sector would mature over the next five years, “far more than any 5 year period in history.”

Both Shalett and The Kobeissi Letter emphasized the outsized risk that plummeting commercial real estate prices would have on small- and medium-sized banks, which hold 70 to 80 percent of all new loans.

“While a soft economic landing is still possible, the odds of that have decreased given recent regional banking turmoil and the implications of tighter lending standards to major sectors of the economy,” Monday’s Morgan Stanley report said.

Newsweek reached out to Shalett for comment.