Concerns about commercial real estate are overblown, a portfolio manager told CNN. Demand for office space has fallen since COVID-19, but other types of real estate have been very healthy. Commercial mortgage bonds have priced in the bad news, and sentiment could improve soon.
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Everyone needs to calm down when it comes to the commercial real estate market.
That's according to Brandywine Global portfolio manager Tracy Chan. In an interview with CNN, she said many of the recent concerns surrounding the commercial real estate sector are overblown.
“If rates peak and the Fed reverses course, that would be very beneficial for the CRE market,” she said. “Even a small cut in rates would go a long way in lifting sentiment. I think the pessimistic sentiment around the CRE market is a little overdone.”
For now, the timing of rate cuts has come further than the market initially expected. Still, the real estate sector is healthier than people think, Chen said. While office buildings are one part of the market that has seen demand drop due to the rise in remote work, the commercial real estate sector is made up of a variety of other property types.
“Commercial real estate is not just office space. There are many types of real estate, some of which are doing very well,” she said. “Suburban office buildings are doing well, Class A buildings, which are in short supply, are doing well, and buildings built after 2010 are in demand.”
Chen also said there are bright spots in the commercial mortgage-backed securities (CMBS) market, which are bonds backed by bundles of commercial real estate loans. While only 10% of all commercial real estate loans are packaged into private-label CMBS, much of the worst news facing the sector has been priced in because investors are demanding high levels of transparency. Bonds saw a strong rally shortly after the Fed paused its rate hikes, Chen said.
“I see this as a sign of a potential turnaround in the CMBS market from a sentiment perspective, which perhaps portends a recovery for the CRE market.”
Still, investors have been spooked recently, and the stress has caused some banks with exposure to the real estate sector, such as New York Community Bancorp Inc., whose shares plunged 26% on Friday after the bank reported “material weaknesses” in the way it underwrites loans.