As the United States approaches a critical deadline to raise the debt ceiling, the commercial real estate market is watching the situation closely. A potential agreement between President Joe Biden and the House of Representatives could prevent a catastrophic default on U.S. sovereign debt, offering a much-needed boost to both the global economy and the U.S. commercial real estate market. 

Bert Haboucha, principal at Los Angeles-based Atlas Capital Advisors, shared his insights on how a prolonged impasse could affect the commercial real estate sector. Banks under pressure may respond by liquidating commercial real estate loans on their books to comply with FDIC regulations. While lending on commercial real estate assets would likely continue, banks may increase fees, lower loan-to-value ratios, and require investors to provide higher equity contributions.  

“Materials for anybody who is in the middle of construction, who is looking for a construction loan anywhere in the US, [is] probably going to be a lot more difficult, a lot more expensive, and at a lower loan-to-value ratios than several days ago.”  —Bert Haboucha

The potential fallout could be significant and immediate. Construction projects could face rising material costs, while obtaining construction loans could become more challenging, with higher borrowing costs and reduced loan-to-value ratios.

Haboucha also warned that a U.S. default would damage the global perception of the country’s creditworthiness, which could have a ripple effect on commercial real estate investments. Many of the largest U.S. office buildings are backed by foreign investors, such as sovereign funds from Singapore, Chinese investment companies, and European firms. If these investors perceive greater risk, they may pull out of the market, reducing foreign investment in U.S. commercial real estate.

“Many of the underlying investors [behind] the biggest office buildings in [the] US are usually foreign entities, whether it’s a sovereign fund in Singapore, or a Chinese investment company, or a European Investment Company. So, when you have these essentially foreign companies looking at real estate in the US and [if they] think it’s riskier than they anticipated, they’re going to be out of the market for a while…”  — Bert Haboucha

Although there is optimism for a positive resolution to the debt ceiling negotiations, the commercial real estate market remains on edge. Bert Haboucha’s insights highlight the challenges and risks the industry could face if an agreement is not reached.