Renowned Economist Warns of Imminent Commercial Real Estate Bubble Burst

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Signs Point to a Looming Crisis in Commercial Real Estate, Says Gary Shilling

In a recent episode of The Julia La Roche Show, Gary Shilling, the economist famed for accurately predicting the 2008 housing crash, has sounded the alarm on what he believes is the next big bubble—commercial real estate. Drawing parallels to the subprime-mortgage crisis of 2008, Shilling notes that while not of the same magnitude, the current situation in the commercial real estate market is beginning to crack.

Shilling, now the president of financial consultancy A. Gary Shilling & Co. Inc., identifies the shift towards remote or hybrid work as a major factor contributing to the downfall. He points out the increasing vacancies in office buildings, with mortgage lenders reluctant to renew loans or demanding significantly higher interest rates.

Office Sector Takes a Hit

The collapse in commercial real estate is most evident in the office sector, with vacancy rates soaring to nearly 1.5 times the levels at the end of 2019, according to Cushman & Wakefield. The report also predicts up to 1 billion square feet of unused U.S. office space by the end of the decade, signaling a precarious situation. Moody’s Analytics describes the current office vacancy rate of 19.2% as “perilously close” to the record-high rate in 1986 and 1991.

Shilling emphasizes that it’s not just the office sector facing challenges; hotels and shopping centers are also in trouble. This impending commercial real estate crisis, coupled with higher delinquency and interest rates, leads some economists to believe that recovery for the market could take several years, describing it as “a trainwreck in slow motion.”

Beyond the real estate market, Shilling predicts a potential recession, estimating a significant decline in stocks of about 30% to 40%. Erin Sykes, Chief Economist at Nest Seekers International, supports these concerns, highlighting the struggle of commercial spaces to meet rent obligations. Delinquency rates for commercial mortgages, including office, multifamily, and other commercial properties, have been on the rise for four consecutive quarters, according to the Mortgage Bankers Association.

While Shilling does not specify when the bubble might burst, others in the industry, like real estate tycoon Jeff Greene, suggest that the correction might already be underway.