File photo shows an aerial view of Manhattan in New York City, the United States. Photo: Xinhua

Market watchers are concerned that the commercial property market might be the next big problem for the US economy after a recent crisis in the banking sector.

This is caused by a combination of factors such as the changes of people's working habits and the economic slowdown, one Chinese expert said, while he pointed out that the severity of the issue will hinge on whether Washington's interest rate hike cycle will taper off at an appropriate time.

According to a Bloomberg report, the Canadian public real estate giant Brookfield Corp has defaulted on $161.4 million worth of office building mortgages. The default covers roughly a dozen office assets, primarily around Washington and happened about two months after the company defaulted on $784 million in mortgages for two Los Angeles office towers, a Forbes report said.

Meanwhile, another leading office landlord Pacific Investment Management Co also defaulted on $1.7 billion office mortgages across major US cities recently, the report said.

Market watchers have attributed the situation to multiple factors, including the interest rate hikes, which have sent mortgage rates higher, as well as the fact that people are increasingly accustomed to remote and hybrid work models, which have dragged down office occupancy rates.

According to Bloomberg, occupancy rates in Brookfield's defaulted offices only averaged 52 percent, down from 79 percent in 2018. In comparison, monthly mortgage payments jumped from $300,000 to $880,000 over the past 12 months due to interest rate hikes.

Some officials are already cautioning about this risk. Jared Bernstein, a member of the White House Council of Economic Advisers (CEA), told a Senate Banking Committee hearing that occupancy rates in commercial real estate were well below pre-COVID levels and delinquencies had risen a bit recently, according to a Reuters report.

"The issue is very much on our watchlist," the person was quoted as saying.

Tian Yun, a veteran Chinese macro economic observer, said that whether the aforementioned defaults will extend to a major risk in the industry depends on the trend of the US' interest rate hike cycle.

"The market generally anticipates that the Federal Reserve will terminate the interest rate hikes by around May and then kick start several rate cuts till the end of this year.

But if US goes on pushing up rates to above 5 percent and holds at that level for a long time, it's very likely that the asset price bubble is going to burst," Tian said.

Observers also cautioned that the property market risks could in turn worsen the banking sector's problems, as more than half of commercial real estate loans are held by regional and smaller banks. Many US assets and insurance companies might also be affected, as they own a lot of those commercial property, Tian said.

Global Times