One of the steepest price declines in at least a half century heightens risks to investors and lenders
Andrea Deghi, Fabio Natalucci, Mahvash S. Qureshi
The commercial real estate sector has been under intense pressure globally as interest rates have risen over the past couple of years. In the United States, with the largest commercial property market in the world, prices have tumbled by 11 percent since the Federal Reserve started raising interest rates in March 2022, erasing the gains of the preceding two years.
Higher borrowing costs tend to dampen commercial property prices directly by making investments in the sector more expensive, but also indirectly by slowing economic activity and reducing the demand for such properties. Nevertheless, the sharp decline in prices during the current US monetary policy tightening cycle is striking. As the Chart of the Week shows, contrary to the current policy cycle, commercial property prices remained generally stable or saw milder losses during past Fed rate hikes. Some of the earlier rate hikes, though, such as in 2004-06, were subsequently followed by a recession during which commercial property prices recorded notable declines as demand fell.
Deep woes
Prices in the US commercial real estate sector have plummeted more in the present monetary policy tightening cycle than in previous episodes.
