Economist warns: Get ready for the commercial real estate bubble!

January 2, 2024
1 min read

Key Points:

  • Economist Gary Shilling predicts that the commercial real estate bubble will burst.
  • WeWork’s bankruptcy filing and the shift towards remote work are signs of the impending collapse.

Renowned economist Gary Shilling, who accurately predicted the 2008 housing crash, warns that the commercial real estate market is in a bubble that is beginning to crack. Shilling believes this bubble is the biggest one facing the economy at the moment. While it may not be as severe as the subprime-mortgage bonanza that triggered the 2008 financial crisis, Shilling suggests that commercial real estate is still vulnerable to a collapse.

One of the major factors contributing to the vulnerability of commercial real estate is the shift towards remote work. The pandemic has accelerated the trend of remote and hybrid work, leading to empty office buildings and struggling central business districts. This shift, combined with the ease of e-commerce, has made it less appealing for businesses to hold onto brick-and-mortar properties.

The collapse has been particularly visible in the office sector, with vacancy rates nearly 1.5 times higher than at the end of 2019. Moody’s Analytics warns that the office vacancy rate is “perilously close” to the record-high rate seen in previous years. The struggling office sector is just one aspect of the larger commercial real estate market crisis, which also includes hotels and shopping centers.

Shilling also predicts that the S&P could fall to its lowest level since the pandemic, and that a recession is likely to happen in the near future. Other economists agree that the commercial real estate market recovery could take several years, describing it as a “trainwreck in slow motion.”

Delinquency rates for commercial mortgages have been rising for four consecutive quarters, with more than 5% of office property loans delinquent in the third quarter. The challenges facing commercial property markets include uncertainty about property values, higher interest rates, and a drop in asset values.

While Shilling did not specify when the commercial real estate bubble will burst, others believe it could already be happening. Real estate tycoon Jeff Greene, who successfully bet against the mid-2000s housing bubble, says that we are just in the initial stages of a commercial real estate correction.

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