A downward spiral of commercial property prices can hurt sectors beyond the real-estate industry, warns Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
Morgan Stanley analysts think commercial property prices could tumble as much as 40%, nearing declines seen in the aftermath of the 2008 global financial crisis.
The estimate comes as trillions of dollars of commercial mortgage debt is set to mature in the next few years, likely in a higher rate environment. But there is also worry of broader ripple effects from half-empty office buildings.
“These kinds of challenges can hurt not only the real-estate industry, but also entire business communities,” Shalett said in a weekly client note. She warned that recent resilience in the stock market to start 2023 “demonstrates that investors continue to ignore genuine risks to the economy and corporate earnings.”
San Francisco Mayor London Breed’s office said a week ago that it was projecting a $780 million budget shortfall in the coming two fiscal years through 2024, up $51.5 million from its projection in January.
Its revised forecast pointed to higher interest rates that make borrowing on residential and commercial real estate more difficult as a drag on the city’s finances, but also to the remote-work dynamic that “makes office space an unattractive investment.”
See: Office property woes could be tip of iceberg if credit freezes up as $1 trillion bill comes due
Beyond potential cracks in commercial real estate, Shalett at Morgan Stanley said other potential sources of stress could come from further pain in the venture-capital world and from private equity, despite its estimated $2.3 trillion capital on hand to deploy.
“The collapse of Silicon Valley Bank put a spotlight on the already-stressed VC industry,” she wrote, adding that venture capital-backed firms employ more than 5 million people and “continue to burn through their cash reserves.”
For private equity, she sees a “dimming economic outlook,” a multiyear slowdown in new fundraising and “markdown risks” at portfolio companies.
The S&P 500 index
SPX,
+0.36%
was up 6.4% on the year through Thursday, while the Dow Jones Industrial Average
DJIA,
+0.01%
was less than 1% higher and the Nasdaq Composite Index
COMP,
+0.76%
had advanced 14.4%, according to FactSet.
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