For the first time in two years, the monthly value of outstanding commercial real estate loans shrank in June, dropping to $5.44 trillion, Capital Economics reported.

Multifamily properties saw the greatest contraction, with the total loan value slumping by $21.6 billion, according to data service Refinitiv.

At the same time, the sector’s delinquency rate edged up to 1.91 percent.

New loans in June totaled just $7.4 billion.

Lending in the sector “is likely to remain weak in the second half of 2023,” property economist Charles Cornes at Capital Economics said to Business Insider.

Banks are tightening lending requirements in general and for commercial property in particular. Several banks have increased their cash reserves to cover bad commercial real estate loans, as we noted in TK and in “Bank Regulators Urge the Industry to Brace Against Increase in Bad Loans” in this issue.

Property values are falling in the post-COVID period for apartments, hotels, retail storefronts, and especially for office buildings. The latter segment of the market could lose as much as $848 billion in value by the end of this decade, analysts have said.

Commercial property values could plummet as much as 40 percent from their COVID-era peaks, analysts at Morgan Stanley have predicted, a loss greater than the one that battered the sector during the Great Recession. 

Any significant loss of value is likely to spike delinquency rates and bankruptcies, analysts have warned.

TREND FORECAST: This loss of value is a forewarning: more than $200 billion in office-related loans are coming due before 2025. Many that are now underwater will need to be paid off or refinanced.  A significant number of property owners will be unable to do either one. Losses through foreclosure or bankruptcy will mount.

Banks will suffer; some will fail while others will be rescued through buyouts. (See “Two More U.S. Banks Bite the Dust” in this issue.)

There will be a domino effect: banks will lose money while also setting aside more cash to cover the losses from loans that go bad. That leaves less money for loans that would grow the economy at a time when a global economic slowdown already is eating away at the underpinnings of growth. 

That nudges the U.S. closer to inflation, the fear of which can become a self-fulfilling prophecy: consumers fear inflation so they save more and spend less; consumer spending accounts for more than two-thirds of the U.S. economy; less spending means a smaller GDP, which increases the risk of recession.

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