The IMF is Worried About Commercial Real Estate

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The International Monetary Fund sees warning signs from commercial property and its risk to financial markets.

For starters, the IMF noted that many businesses were forced to halt in-person operations to slow the spread of the pandemic and send workers to online operations. This occurrence has many experts questioning if businesses will need large spaces or if the commercial property market will recover.

“Going forward, I don’t think we are out of the woods yet for a couple of reasons,” Fabio Natalucci, deputy director of the monetary and capital markets department, said. “One is that, historically, if you go back to the financial crisis there was a difference in time between how equity markets, for example, reacted ... So, they dropped sharply, and they recovered in 2008, but the realization of losses in the commercial real estate took longer.”

“There is a huge amount of uncertainties about the outlook, the economic outlook, so understanding what is conjectural here and what is going to be structural is going to be crucial,” he added.

This could become a major issue for landlords and commercial real estate firms. “In a nutshell: the sector is relevant for financial stability mainly for three reasons. So, the first is because of its large size, secondly it heavily relies on the debt funding and, also is strongly interconnected with other sectors of the economy,” Andrea Deghi, a financial sector expert at the IMF, said.

The commercial property sector is tied to others. For example, Deghi explains that a collapse in the commercial real estate market would put pressure on banks with outstanding loans that could result in “very large capital losses,” he said.

Furthermore, the commercial real estate sector depends on investment apart from banks. “When the value of assets held by these investors fall, they might become less willing or able to provide new financing to commercial real estate borrowers, in particular when their balance sheets become weaker,” Deghi added.

The IMF recommends that policymakers limit debt-service ratios among other policy tools to reduce the risks.

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