There’s a growing chorus of investors and economists — along with Elon Musk — who are warning of a looming crisis in the commercial real estate market.

Analysts with Morgan Stanley recently joined the chorus sounding alarms for the commercial real estate sector, which began facing challenges more than two years ago when the COVID-19 pandemic spurred a sudden shift to remote work and turned downtown offices into ghost towns.

Now, the sector could be the next in trouble amid banking turmoil, which led to the collapse of Silicon Valley Bank and Signature Bank last month.

Utah commercial real estate feeling pandemic’s impact; some sectors faring better than others

Commercial real estate crisis?

“Commercial real estate, already facing headwinds from a shift to hybrid/remote work, has to refinance more than half of its mortgage debt in the next two years,” Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management, wrote in a weekly Global Investment Committee note issued Monday.

Shalett wrote Morgan Stanley strategists are noting the commercial real estate sector faces a “huge hurdle: More than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points.”

Shalett also noted commercial real estate has “primacy on the balance sheets of the regional banks, which in the past cycle accounted for 70% to 80% of all new loan originations.”

Commercial real estate prices, Shalett noted, have “already turned down and office vacancy rates have moved toward a 20-year high.”

Are the West’s housing markets in for more pain after Silicon Valley Bank collapse?

Morgan Stanley analysts are forecasting a peak-to-trough commercial real estate price decline “of as much as 40%, worse than in the Great Financial Crisis,” she wrote.

“Distress of this type has historically not only hurt the landlords and the bankers who lend to them, but also the interconnected business communities, private capital funders and owners of any underlying securitized debt,” Shalett continued. “The tech and consumer discretionary sectors will not be immune.”

Morgan Stanley analysts “fear stresses in other asset classes” like commercial real estate “will become another headwind for megacap stocks alongside those posed by a profits recession and/or economic recession.”

The dark side of Utah’s surging home values: An ‘unprecedented’ tax burden

Venture capital and private equity could also face hurdles, Shalett wrote.

“Venture capital faces markdowns, a cash crunch and a challenging funding environment. In private equity, recent-vintage funds are susceptible to markdowns and a slowdown in raising new funds,” she wrote. “Consider rebalancing portfolios with an eye toward markdowns on illiquid investments. Venture capital and commercial real estate are especially vulnerable.”

While many stock investors have “declared the bear market is over,” Shalett wrote, those calls ignore “the realities that corporate earnings are vulnerable, and turmoil in regional banking could tighten loan standards.” That could in turn trickle down and reverberate across business communities and the economy.

“Stock investors are dismissing the potential effects on the economy from the recent regional banking turmoil such as greatly tightened lending standards, which could increase the probability of a near-term recession,” she wrote.

Elon Musk on commercial real estate

Last week, Tesla and Twitter CEO Elon Musk took to Twitter to declare commercial real estate debt is “by far the most serious looming issue. Mortgages too.”

Musk was reacting to a March 26 tweet by The Kobeissi Letter, a commentary on global capital markets, which stated “over the next 5 years, more than $2.5 trillion in commercial real estate debt will mature. This is by far more than any 5 year period in history.

“Meanwhile, rates have more than doubled and commercial real estate is only 60-70% occupied. Refinancing these loans is going to be incredibly expensive and likely lead to the next major crisis,” The Kobeissi Letter tweet continued.

“The worst part? 70% of commercial real estate loans are owned by small banks. Rapidly rising rates are teaching everyone a valuable lesson. There is no such thing as ‘free’ money’.”

The Kobeissi Letter added rising interest rates, as the Federal Reserve continues to battle record inflation, “seem to be sending ripple effects throughout the economy. From the bank crisis to a commercial real estate crisis, the Fed plays a major role. Meanwhile, rates are still rising.”

Housing market divide: U.S. home prices jump up after 7 months of declines — but not in the West