Garnet Capital Advisors Blog

Commercial real estate has experienced several downturns in the past, but this time it's different. The current economic downturn is not just a typical cyclical downturn. It is being driven by several underlying challenges that are more complex to address.

One of the major factors is the end of a prolonged low-interest rate environment. This has resulted in increased debt costs and a decline in property values. As interest rates rise, businesses' ability to invest in growth and expansion will be impacted. Investors will need to factor in the increased financing costs when making investment decisions.

Another significant issue is the impending pain associated with lease expirations. Landlords have not experienced a downturn coupled with a secular shift in the market since the 1960s and 1970s when the highways and communication advances allowed businesses to relocate to cheaper places. 

Furthermore, the "extend and pretend" approach employed during the last downturn may not be a viable option this time. The commercial real estate industry has undergone significant changes due to the rise of e-commerce and remote work, leading to permanent changes in some sectors.

The pandemic has brought about unprecedented challenges and fundamentally changed how we live and work. As companies adapt to remote work, the demand for traditional office spaces has decreased. This leads to a rise in vacant commercial real estate properties. According to the Wall Street Journal, the office vacancy rate reached an all-time high of 12.9%, surpassing the peak vacancy rate experienced during the 2008 financial crisis.

In the past, fundamental trends worked in commercial landlords' favor when the economy began showing signs of rebounding. As more people are returning to work, filling retail spaces and office towers, building values were able to bounce back after the crisis was over. However, with changes in how we live and work and the rise of new technologies, many commercial landlords are threatened.

Many banks are entering this projected downturn with concentrations in commercial real estate that exceed regulatory guidance, which poses a significant risk to the financial system. If property values don't rebound, loan defaults will increase. Banks may face financial losses that could impact their ability to continue lending and contribute to instability in the financial system. 

Banks Can Use This Time to Clear Sub-Performing Assets

Addressing these challenges will require innovative and proactive strategies that address the unique circumstances of this downturn. Banks can use this downturn to clear underperforming assets and make room for new business. Garnet Capital is here to help banks and credit unions sell off classified loans at favorable prices. Contact us today to reposition your portfolio.