In a weekly client note, Morgan Stanley Wealth Management chief investment officer Lisa Shalett warned clients that the commercial real estate (CRE) sector is poised for a collapse which could be worse than the Great Financial Crisis of 2008. She noted the market faces a “huge hurdle” during which strategists are predicting a property slump of roughly 40%.

She added that it was worth noting that over half of the $2.9 trillion in US commercial mortgages will be up for refinancing over the next two years.

In the note she wrote that the sector will be facing “a huge refinancing wall,” since, “Even if current rates stay where they are, new lending rates are likely to be 3.5 to 4.5 percentage points higher than they are for many of CRE’s existing mortgages.”

The report’s warning comes on the heels of the turmoil set off in the banking sector by the collapse of Silicon Valley Bank and two other regional lenders, as well as the continued interest rate hikes by the US Federal Reserve as it continues its attempts to contain a very persistent inflation.

In addition to the issues with interest rates, the commercial real estate market is also battling with a loosening market for office space as remote work operations begun during the pandemic, tightening margins, and rising maintenance costs all continue to weigh on demand.

Shalett noted, office vacancy rates recently moved toward a 20-year high, saying, “These kinds of challenges can hurt not only the real estate industry, but also entire business communities related to it.”

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