by Calculated Risk on 4/10/2023 10:34:00 AM

Today, in the Calculated Risk Real Estate Newsletter: A Few Comments on Commercial Real Estate
A brief excerpt:

The focus of this newsletter is residential real estate, although I follow several commercial real estate (CRE) sectors on my blog. There have been numerous warnings recently about a potential CRE lending crisis and I’d like to add a few comments.

First, when most people think “CRE” they think office and retail space. The concern for retail is online shopping eroding in-store buying (a long-term trend), and work-from-home (WFH) reducing the need for office space (another long-term trend that increased sharply during the pandemic but has reversed recently).

However, there are many other CRE sectors in addition to office and retail: lodging (hotels), health care, warehouses (including self-storage), manufacturing facilities, food and beverage establishments, power and communication, amusement and recreation (Disneyland!), religious, transportation and more.

Most of these other CRE sectors are fine. Of the $11.1 trillion invested in CRE since the year 2000 (according to the BEA), about 12% was in offices and 4% in malls. These are important sectors, but there is much more to CRE.
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The office sector is concerning mostly due to the shift in the need for space with WFH increasing. However, there wasn’t the extreme overbuilding and poor underwriting that we saw in the 1980’s. This graph shows investment in offices, malls and lodging as a percent of GDP through Q4 2022.

Investment in offices (blue) was increasing prior to the pandemic, but the increase was nothing like the office building boom in the ‘80s with poor underwriting. From 1981 through 1989, office investment averaged 0.7% of GDP - about double the normal level of investment. The vacancy problem this time is related to decreased demand.

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