Morgan Stanley issues apocalyptic real estate warning

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US commercial property will be the next domino to fall after the banking crisis, the Wall Street bank warns

Morgan Stanley Wealth Management has predicted a collapse in the US commercial real estate (CRE) sector that will be worse than the Great Financial Crisis. The market faces a “huge hurdle,” with strategists expecting a commercial property slump of around 40%, worse than in 2008, according to chief investment officer Lisa Shalett.

More than half of the $2.9 trillion in US commercial mortgages will be up for refinancing in the next couple of years, she points out. 

“Even if current rates stay where they are, new lending rates are likely to be 3.5 to 4.5 percentage points higher than they are for many of CRE’s existing mortgages,” she wrote in the report, adding that the sector is facing “a huge refinancing wall.”

The dire warning follows turmoil in the US banking sector, and successive interest rate hikes by the Federal Reserve, aimed at curbing runaway inflation.

Aside from interest rates, the commercial real estate market is also grappling with sluggish demand for office space brought on post-pandemic remote work, and rising maintenance costs.

“These kinds of challenges can hurt not only the real estate industry, but also entire business communities related to it,” Shalett noted, adding that office vacancy rates recently moved toward a 20-year high.

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