CRE Defies Rising Tide of Global Debt Levels
Beth Mattson-Teig | May 30, 2018
The International Monetary Fund (IMF) has been sounding warning bells about the high levels of global debt. But U.S. commercial real estate has been defying that trend, which could make the sector even more attractive as a “safe haven” for global capital.
The financial crisis exposed the risks of high-leverage commercial real estate debt strategies. Many owners worked to restructure debt and lower leverage across portfolios as property values plummeted. REITs in particular ratcheted back on leverage as ratings agencies adopted a tougher stance on debt levels. Nearly a decade after the financial crisis—and a prolonged period of exceptionally interest rates—commercial real estate companies continue to operate in a lower leverage environment.
A recent CBRE report noted that loan-to-value (LTV) ratios on permanent, fixed-rate financing are now averaging nearly 60 percent, more than 15 basis points below the 2007 average of 75.3 percent. The report also cited NCREIF data that shows a similar trend with debt-to-market value at 41 percent compared to an average of 48 percent in 2007.
The more conservative climate is a stark contrast compared to high global corporate and government debt levels. The IMF has noted its concern for high debt levels and the risk that might pose in the event of a downturn. According to the IMF, global debt hit a new record high of $164 trillion in 2016, which is the equivalent of 225 percent of global GDP—12 percent higher than the previous high set in 2009. Of that $164 trillion, 63 percent is non-financial private sector debt and 37 percent is public sector debt.
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