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Owners of prestigious office buildings in New York and London are opting to abandon their financial obligations instead of continuing to invest in an unprofitable venture. Similarly, the proprietors of the biggest mall in downtown San Francisco have deserted their property. Additionally, a newly constructed skyscraper in Hong Kong has only managed to lease a mere 25% of its available space.
This gradual deterioration within the commercial real estate sector resembles a concealed and troubling issue permeating the global economy. Despite the surge in stock markets and the optimistic outlook of investors regarding a potential decrease in the rapid rise of interest rates, the problems within the real estate industry are anticipated to persist for several years.
Following an extended period of extensive purchasing facilitated by inexpensive loans, proprietors and lenders are now confronting the challenges brought about by shifts in the ways people work, shop, and reside due to the aftermath of the pandemic.
Simultaneously, the escalation of interest rates is leading to increased costs for the acquisition or refinancing of properties. A critical moment is approaching solely in the United States, approximately $1.4 trillion worth of commercial real estate loans are in play.
As reported by the Mortgage Bankers Association, owners in the commercial real estate sector may opt to default instead of seeking further borrowing to meet substantial principal payments as a result of rising interest rates. Prominent institutional owners such as Blackstone, Brookfield, and Pimco have already made the decision to cease payments on certain buildings, as they find alternative ways to allocate their funds and assets more effectively. The volume of transactions is sharply declining, and even when deals do occur, the decline in prices is significant. In the United States, the value of high-quality office spaces designated for institutional use has witnessed a decline of 27 percent since March 2022.
As indicated by data analytics company Green Street, when interest rates began to rise, various segments of the real estate market experienced significant declines in prices. Apartment building prices, for instance, have dropped by 21 percent, while malls have seen an 18 percent decrease. Projections from PGIM Real Estate, a subsidiary of Prudential Financial, suggest that office prices will likely decrease by over 25 percent in Europe and nearly 13 percent in the Asia-Pacific region before reaching their lowest point.
The challenges faced by commercial real estate will further burden an already strained financial system, which has been grappling with the regional bank crisis this year. Additionally, as the downturn intensifies, it is expected to have a profound transformative impact on certain cities as they confront issues such as vacant buildings and reduced property tax revenue.
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