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By Greg Robb

'I expect a major correction in commercial real estate is already underway,' says Adam Posen of the Peterson Institute for International Economics

The commercial real-estate sector is headed for a "real mess" but not necessarily a financial disaster, a leading economist said Monday.

"I expect a major correction in commercial real estate is already under way," said Adam Posen, president of the Peterson Institute for International Economics.

The cause is not complicated. Office occupancy is "lastingly" down 30% to 40% since the start of the pandemic, he said.

Even if the problem is that simple to diagnose, the cure has been slow in coming. The whole industry seems frozen in place. "We haven't seen smooth repricing or terribly transparent repricing of the mortgages and commercial-real-estate lending that is held in nonbank financial intermediaries," Posen said.

A disproportionately large share of the lending in commercial real estate went through so-called shadow banks. That these private-equity lenders aren't banks may make the situation less threatening to the entire economy.

But at the same time everything is opaque. And the sector isn't regulated.

"Is it a financial disaster? I hope not. I don't expect so," Posen said. But, he said, it could have a negative effect on wealth and city budgets and the real economy.

Municipal tax revenues may be hit hard because they are based on rental rates.

-Greg Robb

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March 28, 2023 11:15 ET (15:15 GMT)

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