US commercial real-estate prices just fell for the first time in 12 years - and are likely to drop further, Moody's warns

• US commercial real-estate prices fell last quarter for the first time in 12 years - and may drop more, according to Moody's Analytics.
• "We're on a razor's edge here," the firm's chief economist Mark Zandi told Bloomberg.

Commercial real-estate (CRE) prices in the US saw their first decline in 12 years last quarter, and are likely to drop further, Moody's Analytics has warned.

The drop was less than 1% and was brought on by a fall in the prices of offices and apartment buildings, according to a Bloomberg report citing Moody's analysis, which pulled data from courthouse records of transactions.

But the firm's chief economist Mark Zandi said he anticipates more CRE price declines - and recently forecast a 10% plunge from their peak by mid-decade, along with a wave of defaults.

If the US economy slips into a recession, however, the declines could get worse, according to him. "We're on a razor's edge here," Zandi told Bloomberg.

Experts have been warning of increasing stress in the commercial property market for months, due to higher borrowing costs and faltering demand for office buildings as work-from-home trends persist.

In response to historic inflation, the Federal Reserve has hiked interest rates from virtually zero in March 2022 to upward of 5% currently. Higher rates encourage saving over spending and raise borrowing costs, which tends to reduce demand and pull down asset prices.

They've also hit some banks' fixed-income portfolios, sparking a flurry of lender failures in recent months.

The banking jitters has fanned fears that lenders will pull back on lending, causing a credit crunch. A painful combination of higher interest payments, tighter availability of credit, and lower asset values has stoked concerns among investors about some segments of the heavily indebted CRE industry.

However, Zandi previously noted that even if loan delinquencies and defaults rise, that is unlikely to reignite the banking turmoil.

"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 in a series of tweets this week.