Economist notes risks and resets ahead for CRE

As part of a broader economic outlook, Lindsey Piegza, PhD, chief economist at Stifel Financial, shared an overview of the real estate market with senior banking leaders at the Bank Holding Company Association’s Fall Seminar on Tuesday..In residential real estate, Piegza noted a lockout effect, with affordability rates at record low levels, coupled with the lock-in effect of homeowners who might normally downsize and free-up inventory holding onto mortgages with much lower interest rates than are currently available.But Piegza said the biggest real-estate risk to the economy comes from the commercial side.Noting that trillions of dollars in commercial loans are coming due over the next couple of years, Piegza emphasized they’ll “be resetting at significantly higher rates … driving LTVs from 30 or 40 percent up to 70 or 80 percent, maybe higher.”Piegza said the risk was compounded by periods of temporary pacification grounded in a hope of returning to a lower interest rate environment.“We've been watching this for several years, and we've seen we can’t continuously kick it down the road.”“Where is all this commercial paper being held? It's not at the big guys. It's at the midsize and smaller financial institutions,” Piegza said.Noting that it will take a significant amount of additional capital to right-size resetting loans, Piegza said lenders would have to re-evaluate whether those infusions are prudent. “The return-to-office ratio in the years post-COVID is still 50 percent on the top end. There may not be the population support to justify that further infusion in capital.” The commentary on real estate was one facet of a broader evaluation in which Piegza highlighted the resilience of the consumer, the efforts of businesses to minimize pass-throughs from inflation and tariffs, and the Fed’s progress and likely path for restoring price stability. Additional details will be posted here soon.