Extract from Epiq’s article: “Correlating Commercial Real Estate and Bankruptcy Trends”
Is the U.S. commercial real estate market in a bubble about to burst? Several financial market analysts would answer this question with a yes, it’s more likely than not that the sector will experience some significant financial distress. Commercial real estate has not rebounded in this post-pandemic economic environment, inflation continues to rise, and interest rates are climbing upward. Demand for office space has been significantly reduced as companies reassess and realign their office space needs. It appears that some form of hybrid work will remain for a significant percentage of the workforce. As a result, commercial bankruptcies are on the rise. Per Epiq data, March 2023 commercial bankruptcy filings were 79 percent higher compared to March 2022. Additionally, analysts have reported that followed by a quick deflation – the $2.9 trillion in commercial mortgages due will need to be renegotiated in the next two years. The current dynamics indicate that a financial crisis affecting the commercial real estate market is on the horizon.
But is the commercial real estate market in a bubble? By definition a bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. This fast inflation is quickly followed by a quick decrease in value, or a contraction, that is sometimes referred to as a “crash” or “burst bubble”. Values of commercial real estate have decreased as the need for office space has been significantly reduced. It doesn’t appear that this crash will create a financial crisis but rather, it will add distress to an already recession-like environment.
Market Conditions
BankruptcyData.com indicated that real estate companies are prime candidates to seek bankruptcy protection. As noted, rising interest rates coupled with hybrid work are the two main factors affecting the market. Let’s dive into this a little deeper.
