Commercial Lenders and Investors Express Concern Over Falling Commercial Property Valuations

Commercial real estate has been a cornerstone of the American economy for decades, providing stable income streams for investors and landlords alike. Recent trends, however, suggest that commercial property valuations are declining across the U.S. This is attributed to a variety of factors, including the pandemic, changes in consumer behavior and rising interest rates.

Commercial office buildings have been hit the hardest. Some analysts are predicting office and retail property values could fall as much as 40 percent. The COVID lockdown forced many businesses to close or reduce operations, leading to a decline in demand for office and retail space. The work-from-home phenomenon has had a significant impact on the office space sector, but there are signs of relief as many larger companies like Amazon, Apple and Disney are requiring workers to return to the office.

Changing demographics and consumer behavior are also contributing to the decline in commercial property values as baby boomers are retiring and downsizing in record numbers. Many retailers are closing their physical stores and moving to online sales where they have less overhead and a broader customer base, leaving a glut of retail space on the market. Many employees are now working remotely, so businesses don’t need the office space they once did.

Smaller banks are more exposed in the commercial lending sector with commercial loans accounting for 40 per cent of their total lending — compared to 13 per cent for larger banks. According to Morgan Stanley analysts, approximately $1.5 trillion of commercial lending debt will require some sort of renegotiation or repayment by the end of 2025. Higher interest rates will make refinancing difficult.

Tony Natsis, a senior executive at Allen Matkins real estate law firm, stated, “If you have maturing debt, you can’t carry the existing debt load, and you’re not willing to put more money in, then it’s foreclosure”. He also added that most lenders are willing to modify existing loans rather than take back property in a bad market.

So, what can a commercial property owner do to help boost their property value and minimize their loss in revenue? One option is to consider looking at their green credentials and sustainability. Commercial tenants are increasingly more interested in energy efficiency, low carbon emissions and healthy working environments for their employees. Property owners who ignore these concerns will lose marketability to potential tenants and subsequently market value of their property. Commercial property investors often consider ESG (Environmental, Social and Governance) factors when looking at risk versus growth opportunities in the commercial real estate market.

The small to mid-sized banking community with heavy exposure in commercial loans can take steps to minimize their risk by staying on top of their valuation data. Knowing the current value of a property is the first step in evaluating disposition strategies in the coming years. Identifying properties in a lending portfolio that are worth less than the amount owed can allow time to take proactive measures with borrowers to mitigate foreclosures.

New Vista Solutions has partnered with the nation’s largest and most complete database manager of government rebates available to property owners who build or upgrade commercial and residential property using energy-efficient and resilient materials. New Vista also offers cost-effective AVMs and Evaluation solutions for commercial lenders to obtain property value data quickly. Visit green.newvistasolutions.com and www.newvistasolutions.com/commercial-solutions for more information.