US commercial real estate probably won't recover from crisis until 2040, thanks to out-of-fashion office buildings, economist says

• US commercial real-estate values aren't likely to recover until 2040, according to Capital Economics' deputy chief property economist.
• That's due to higher interest rates and a shift to remote work trends, both reducing appetite for office space.
• "It's quite possible to see that recovery take much longer than the 15 years that we've penciled in and it could be well into the mid-2040s even," Kiran Raichura said.

The US commercial real-estate sector will recover at a painfully slow rate from its deepening downturn as office buildings go out of fashion, according to Capital Economics' deputy chief property economist.

Kiran Raichura said office values are unlikely to rebound to their peaks until 2040 thanks to the strengthening work-from-home trend, and high interest rates.

"It's very easy to see values take much longer to get back to those levels, and actually, the growth rate we've assumed to get back to the peak after the size of the fall we're expecting over the next few years is higher than the rate in the last 10 or 20 years," Raichura said.

"So actually, it's quite possible to see that recovery take much longer than the 15 years that we've penciled in and it could be well into the mid-2040s even," he added.

The commercial real estate (CRE) industry has been under stress since the US regional-banking sector faced a bout of turmoil earlier this year. Regional lenders, which are key sources of CRE financing, could face a wave of defaults as commercial property owners struggle with tightening credit conditions and higher interest rates.

Columbia Business School professor Stijn Van Nieuwerburgh recently warned that the pain is just beginning for commercial real estate - and tumbling prices could fire up the banking crisis again and hurt the US economy.

Furthermore, rising distressed commercial real-estate assets is adding to concerns a crisis may be brewing in the sector.

The amount of troubled CRE assets, meaning properties that are forced to be sold as owners can't afford to pay their mortgages, jumped by 10% in the first quarter to about $64 billion, per a recent MSCI Real Assets report. Another $155 billion of assets may be at risk of turning bad, according to the report.

On a brighter note, Raichura forecasts retail properties, which have been suffering the most previously, could see a rise in value over the next 5 years.