Commercial Real Estate Fears Are Overblown, Market Has Silver Linings

  • Commercial real estate fears are overblown, a portfolio manager told CNN.
  • While demand for office spaces has slumped post-COVID, other property types are quite healthy.
  • Commercial mortgage bonds have priced in the bad news and sentiment could soon improve.

Everyone needs to chill out about the commercial real estate market.

That’s according to a portfolio manager at Brandywine Global. In an interview with CNN, Tracy Chen said much of the recent hand-wringing over the commercial property sector is overblown.

“If we are at the peak of interest rates, and if the Fed pivot (to cutting rates) happens, that would be tremendously beneficial for the CRE market,” he said. “Even a marginal reduction of interest rates should be a tremendous help in lifting sentiment. I think that the gloomy sentiment around the CRE market is a little overdone.”

For now, the timing of the rate cuts has been pushed further out than markets initially expected. Even so, the property sector is healthier than people think, Chen said. While one slice of the market — office buildings — has seen demand crushed by the rise of remote work, there’s a range of other property types that make up the commercial real estate sector.

“Commercial real estate isn’t all about office space, there’s a broad spectrum of property types, and some are doing really well,” she said. “Suburban offices are doing well, so are Class A buildings, which are in short supply. And buildings built after 2010 have been in demand.”

Chen also said there are silver linings in the market for commercial mortgage-backed securities, which are bonds backed by bundles of loans on commercial properties. Only 10% of all commercial mortgages end up being packaged into private-label CMBS, but because investors demand a high level of transparency, much of the worst news facing the sector has been priced in. The bonds have staged a strong rally on the heels of a Fed pause in rate hikes, Chen said.

“I take that as a signal of a potential turn in the CMBS market in terms of the market sentiment. I would say this probably is a forerunner to the CRE market recovery.”

Still, investors have appeared jittery of late, and some banks exposed to the property sector, such as New York Community Bancorp, have seen their share price buckle under the stress. Share of the bank plummeted 26% on Friday after reporting “material weakness” in how it reviews loans.