In a surprising turn of events, the U.S. mortgage market just experienced its most robust week in months, with total home loan applications soaring by 2.8% in the week ending December 1, according to the Mortgage Bankers Association. However, before we break out the confetti, there’s a catch – mortgage rates are still hanging around 7.17%.
The optimistic trend is currently confined to residential real estate, leaving the commercial real estate (CRE) market in the shadows. A significant concern is looming over the sector in the form of record office vacancies, particularly in major cities like New York, Los Angeles, and San Francisco.
The dire situation is underscored by the staggering 22.7% office vacancy rate in New York City, double the decades-long average. San Francisco faces an even grimmer scenario, with office vacancies hitting a whopping 33.9%, reaching new highs each quarter for nearly two years.
The pandemic’s lingering effects have sparked this commercial real estate crisis, and while a gradual return to office spaces is anticipated, a complete reversal seems unlikely. This translates to persistently high vacancy rates at a time when commercial mortgages are due for refinancing, and new lending rates for CRE are poised to outstrip existing rates.
The consequences are severe, with landlords in some areas refusing to pay mortgages or refinance, leading to banks repossessing properties. Notable players in the CRE arena, including industry giants like Brookfield and Blackstone, are defaulting on mortgages and relinquishing control of their office towers, a savvy move for landlords but a catastrophe for banks.
The looming storm poses a significant threat to banks heavily invested in CRE, particularly office spaces in major cities. The writing is on the wall, and these financial institutions could find themselves in deep trouble sooner rather than later.
However, where there’s chaos, there’s opportunity. Astute investors who can decipher the signs may find themselves in a prime position to capitalize on the impending shifts in the real estate landscape. As 2024 unfolds, the focus on interest rates becomes more crucial than ever, shaping the future of both the real estate market and investment strategies.
Sven Franssen