JPMorgan Asset Management chief warns on commercial real estate risks

The chief executive of JPMorgan Asset Management has warned that commercial real estate forms one of the critical areas of risk in global markets after the aggressive monetary tightening by the US central bank.

“When the Federal Reserve hits the brakes, something goes through the windshield,” George Gatch said at the $2.5tn asset manager’s European Media Summit on Tuesday.

“We saw that with a bursting of a speculative bubble, of Ark [Invest],” said Gatch, referring to growth investor Cathie Wood, whose flagship fund’s share price dropped by two-thirds last year but has since partially rebounded.

“We saw it in a huge repricing in fixed income, in [UK pension funds’ liability driven investment strategies],” he added. The failure of California-based lender Silicon Valley Bank earlier this month, and the weekend’s emergency takeover of Credit Suisse, also highlight the stress of rising interest rates, he said.

All of these episodes have left investors and policymakers wondering “what is the next impact”, said Gatch. “Commercial real estate is an area of concern. We have higher interest rates for property developers, how does that impact the real estate market and lenders in that space?”

Private market assets are also at risk of shifting lower in price as public markets have already done, he said. “I’m not forecasting doom and gloom but these would be areas I would be concerned about.”

Commercial property values have started to slide in recent months, as rising borrowing costs have hit investors’ ability to transact.

Investors are keeping a close eye on property funds such as private equity firm Blackstone’s Blackstone Real Estate Income Trust. Breit, which has become a barometer of the health of the commercial property market, is one of the most high-profile examples of several property funds forced to limit withdrawals as rising interest rates prompt investors to head for the exit.

In a note on Tuesday, Goldman Sachs said the commercial real estate sector was dealing with a “challenging” environment. “The recent stress in the banking sector has fuelled growing concern about spillover effects on the commercial real estate industry. With over half of the $5.6tn of outstanding commercial loans sitting on bank balance sheets, bank lending remains the primary source of funding for the sector. This is particularly the case for small banks which capture the lion’s share of lending.”

Also on Tuesday, Bank of America said investors in its monthly fund manager survey were more bearish on real estate than they have been since October 2020, having taken cautious positions on the asset class since September. “Concerns over commercial [and] office real estate are driving growing anxiety over the sector.”