Commercial Real Estate: It is more than just office

Posted: 7/24/2023 by Fidelity Investments

Recent bank failures and rising interest rates have cast a shadow on the commercial real estate industry, which includes a heterogeneous set of property types.

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Key Insights

  • Higher interest rates and slowing economic growth have created challenges for the commercial real estate (CRE) industry.
  • Broad CRE fundamentals are sound, but the office sector faces unique pressure as the COVID-19 pandemic dramatically accelerated trends toward flexible and hybrid work arrangements.
  • Office space utilization is unlikely to recover to pre-pandemic levels, and we expect occupancy to fall further as many tenants reduce office footprints upon lease renewal.
  • The banking crisis has fueled worries that banks will become more conservative in providing CRE loans as interest rates rise and the sector's fundamentals decelerate amid slowing growth.
  • We see minimal risk of widespread defaults and anticipate things playing out gradually as most borrowers will likely pay off their loans at or near maturity, while troubled loans will likely be granted extensions.
  • Commercial real estate does not pose a systemic risk to the U.S. banking sector and the broader financial markets, in our view.
  • Non-bank lenders have an opportunity to fill the void left by banks and take advantage of a unique opportunity to originate CRE loans with lender-friendly terms.
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