Jun 15, 2023 - Economy

Why you shouldn't worry about commercial real estate

Illustration of a city skyline made of dollars.

Illustration: Brendan Lynch/Axios

Commercial real estate could well be the next big shoe to drop. But even if it is, the systemic repercussions are likely to be small. That's the message being sent not only by Fed chair Jay Powell on Wednesday but also by New York City Comptroller Brad Lander.

Why it matters: Billions of dollars are tied up in commercial real estate, and much of that wealth could end up getting vaporized.

What they're saying: Powell downplayed concerns that a fall in commercial real estate values could constitute a systemic risk to the economy as a whole.

  • Some banks more exposed to the sector "will experience larger losses," he said, but broadly the risk is "well-distributed" and the banking system is capable of absorbing the losses.

By the numbers: In terms of New York City property tax revenues, Lander limns four scenarios.

  • His baseline forecast shows New York property tax revenues going up over the next three years, rising from $35 billion in 2024 to $37 billion in 2027. Even the "Doomsday" forecast, under which commercial property falls in value by 40% over six years, property taxes still rise in 2027 to $36 billion.
  • That's a shortfall of $1.1 billion compared to the baseline forecast, but even that shortfall represents only 1.4% of city tax revenues. "It is well within the range in which tax revenues can ordinarily vary," writes Lander.

Between the lines: Property taxes aren't based on valuations, they're based on operating income. Because commercial real estate operates on very long leases, that operating income tends to change very slowly, and any concomitant change in tax revenues is similarly slow.

Be smart: When wealth gets wiped out, the damage to the economy is a direct function of the ability of the owners to withstand that drop.

  • Commercial real estate owners are among the very richest people in America, and they can afford to see their equity wiped out.

The bottom line: If you own or have lent money against a lot of commercial real estate, especially in New York or San Francisco, there are a lot of reasons for you to be worried right now. If that doesn't describe you, however, there's no reason for you to be losing any sleep.

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