Slow-Moving Property Crisis Means Averting a Greater One

The big news in the $20 trillion US property market last week was that, for the first time since the financial crisis, investors suffered losses on top-rated bonds backed by the mortgage on an office building. Don’t panic. Signs are emerging that we may be closer to the end than the beginning of a shakeout in commercial real estate.

It’s been a tough couple of years. A widely followed index of commercial property prices, published by the National Council of Real Estate Fiduciaries, tumbled 12% from its peak in 2022 after the Federal Reserve began rapidly tightening monetary policy. Lending evaporated as higher borrowing costs wreaked havoc with the balance sheets of regional banks, the primary financiers of these properties. On top of that, the pandemic changed how we lived, worked and shopped, leading to higher vacancy rates for many landlords.

significant slide

With the sector in disarray, transaction activity collapsed. Now, there’s evidence emerging that the market has bottomed. Upward revisions to recent monthly deal volumes reported by MSCI Real Assets are an encouraging sign, according to analysts at JPMorgan Chase & Co. The figure for March was revised higher from originally reported data by 9.5% to $25.8 billion, excluding “entity” transactions such as public company mergers and acquisitions. JPMorgan forecasts April’s numbers will be revised higher by 30% to $22.2 billion, representing less than a 1% decline from a year earlier. “We think that is a good place to start the second quarter,” the analysts wrote in a research report dated May 22.