Prominent business leaders are not shying away from kicking the commercial real estate industry while it’s down.
Apollo Global Management CEO Marc Rowan is the latest to sound off on the sector, echoing points others have made about distress, particularly with office properties. He provided his ominous forecast while speaking at the Milken Institute Global Conference, according to Bloomberg.
Rowan said it was a “bad day to be an office owner in San Francisco and Chicago.” He also said losses were coming for landlords, and while they wouldn’t be systemic, they would be “concentrated.”
Hours earlier, First Republic Bank had been seized by regulators and sold to JPMorgan Chase. Rowan said the regional banking crisis could lead to a “second wave” of losses in commercial real estate.
The numbers support Rowan’s assessment of office owners in the Windy City and the Golden City. In Chicago, the first-quarter vacancy rate hit 22.4 percent, a record for the market, according to a report from CBRE. In San Francisco, a Savills report put the first quarter-vacancy rate at a staggering 32.7 percent.
But it’s not a particularly good time to be an office owner anywhere. The vacancy rate at the end of the first quarter for the country was 19 percent, according to Cushman & Wakefield, and distress has been looming in commercial real estate since interest rates jumped.
Other speakers at the event highlighted some potential winners in the office market. One familiar refrain was that owners with high-quality properties in strong locations could garner better rents.
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Still, comments about the ills of commercial real estate have proliferated. This weekend, 99-year-old Berkshire Hathaway vice chairman Charlie Munger told the Financial Times that banks are riddled with bad commercial loans as property values fall. “Office has seen the largest price declines, where even high-quality properties are down 25 percent over the past year,” said Green Street’s Peter Rothemund.
And it’s not just office, Munger noted.
“We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties,” said the Warren Buffett confidante. “There’s a lot of agony out there.”
— Holden Walter-Warner