Due to higher rates and tighter financial conditions, two of the market’s largest players are experiencing pressures in the commercial real estate market.
Since the demand for commercial real estate properties faltered over the past year, Blackstone’s distributable earnings have declined significantly. According to the asset manager’s latest financials, profits from the sale of assets fell to $4.4 billion over the last quarter, a 54% drop from $9.5 billion it cashed in during the first quarter of last year.
In the meantime, Bloomberg reported last week that Brookfield Corporation had defaulted on $161 million in office debt. A few months earlier, Brookfield defaulted on $784 million of commercial real estate debt backed by two big office towers in Los Angeles.
According to two of the largest real estate firms, a year of rising interest rates and a recent credit crunch sparked by tighter lending conditions as banks pull back after March’s turmoil are pressuring the market.
In the meantime, commercial property owners are refinancing maturing commercial mortgages at much higher rates than when they originated.
As a result, small- and mid-sized regional banks, who finance around 80% of commercial real estate debt, have tightened lending. About $1.5 trillion in commercial mortgage debt is approaching maturity, and will need to be refinanced in the near future.
In addition to the decline in office demand due to work-from-home trends, other areas of the market have also shown signs of stress. Apartment sales, for example, just hit their lowest point since 2009.
According to Morgan Stanley, commercial property prices could eventually plummet 40% from their peak, which could echo the 2008 crisis.