Commercial real-estate prices could tumble 10% from their peak and defaults are sure to increase, Moody's chief economist says

• Expect commercial real-estate prices to plunge 10% from their peak, along with a wave of defaults, Moody's chief economist said.
• "Lots more CRE price declines are coming, with prices expected to be off 10% peak-to-trough by mid-decade," Mark Zandi said.

Prepare for a 10% drop in commercial real-estate prices from their peak, and a wave of defaults, according to Moody's chief economist.

In a series of tweets, Mark Zandi highlighted concerns that commercial real estate (CRE) could be the "next shoe to drop" in the economy after the banking sector was engulfed in turmoil following the collapse of Silicon Valley Bank.

"Lots more CRE price declines are coming, with prices expected to be off 10% peak-to-trough by mid-decade," he said.

Zandi noted that the stress in commercial property is caused by a combination of many adverse factors - including high interest rates, tightening credit conditions, and waning demand for office buildings due to work-from-home trends.

"Demand for space is weak due to remote work and online retailing. Lots of multifamily units are being built. And credit to refinance and purchase properties is tough to get," he said.

With small and mid-sized regional lenders highly exposed to the commercial real estate sector - financing around 70% of all debt in the commercial property industry - investors have become increasingly anxious about the overall health of the US financial system.

However, Zandi notes that in the event of rising loan delinquencies and defaults, it's unlikely to reignite a banking crisis.

"CRE loan delinquencies and defaults are sure to increase, causing agita for the banking system. But it shouldn't be the catalyst for a revival of the banking crisis. Limiting losses is the ample equity built up in most properties due to the big price gains during the pandemic," Zandi said.