The economy & your investments
Join our Chief Economist and Chief Investment Officer as they discuss the global economy, inflation, interest rates, and the investment landscape.
Towering structures with the capacity for thousands are now considered excessive, while compact, clean energy spaces, with hot-desking are coming in vogue. HSBC, which has had its global headquarters in Canary Wharf since 2002, is not the first of the financial district’s long-term residents to announce a move away from the Docklands, and likely won’t be the last.
Law firm Clifford Chance announced that it would be making a similar move, while banks such as Barclays and Citigroup have closed ancillary offices and sub-letted unused floors of their buildings.
The shift to hybrid working has added further pressure to the commercial real estate sector, which is already struggling with a difficult macroeconomic environment. The issue is not unique to the UK - high interest rates across the world have hit the sector from multiple directions:
Most commercial property is held privately, meaning valuations can take months or years to fully react to higher interest rates. However, the struggles of commercial property are evident in the share prices of publicly traded real estate companies (real estate investment trusts, or REITs). These have fallen significantly over 2022 and 2023. REITs which invest in office space have seen the largest declines, falling as much as 10% - 30% across the UK, US, Europe and Asia over the last five months.
All of this means that a significant rise in defaults in this sector is a real risk. Some defaults have been seen already among even large landlords. In February, the Columbia Property Trust defaulted on $1.7 billion worth of mortgages on seven buildings. In the same month, Brookfield Corporation defaulted on loans tied to two Los Angeles skyscrapers. The tenants of these buildings included Twitter and Deloitte.
The fact that well capitalized money managers, with reliable tenants and prime locations are finding default to be a preferrable option should be a cause for concern. It raises the question: how will the owners of older and less occupied buildings cope?
A widespread increase in defaults would have enormous ramifications for the global economy. Past crises, including the Savings and Loans crisis of the 1980’s and the Global Financial Crisis of 2008 were accompanied by surges in commercial real estate delinquencies. And time is running out. According to Morgan Stanley, (Bloomberg, 2023) $1.5 trillion worth of debt is looming for the US alone before 2025. The longer that central banks keep interest rates high, the lower the chance that a crisis can be averted.
Tao Yu, Quantitative Analyst
On Wednesday 26 July, join our Chief Economist and Chief Investment Officer as they discuss the current economic landscape, both here in the UK and globally.
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