Finance: Toxic debt threatens the commercial real estate sector

Financial debt is an essential tool for financing growth and investments. However, it can become a problem when its value exceeds that of the assets it finances. This is the case in the commercial real estate sector, which has been hit hard by the consequences of the pandemic.

About 14% of all commercial real estate loans and 44% of loans on office buildings appear to be in “negative equity,” meaning the debt is now greater than the property value, per the National Bureau of Economic Research.

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Finance: debt, a double-edged lever

In Finance, financial debt is a strategic lever for funding growth or investments. But it carries risks, including excessive indebtedness. This occurs when the debt becomes greater than the actual value of the assets.

The debtor is thus unable to repay the debt by selling their assets, even in the event of liquidation. They find themselves in a situation of “negative equity” or “toxic debt”.

The finance crisis particularly affects the commercial real estate sector, which has felt the full impact of the pandemic. According to the National Bureau of Economic Research, approximately 14% of all commercial mortgage loans and 44% of loans on office buildings are in “negative equity” in the United States.

A study by Green Street Advisors predicts that commercial real estate values will drop by $480 billion in 2024, following a loss of $590 billion in 2023.

Crypto, an innovative and responsible alternative

Facing this financial situation, players in the commercial real estate sector must find solutions. Crypto is part of them. It allows for diversification of financing sources. Moreover, it can be used to securitize real estate assets.

However, cryptocurrencies are subject to strict regulations and have legal risks. It is therefore necessary to find a judicious balance between the risks and opportunities.

Finance is thus faced with the challenge of debt exceeding the real value, threatening financial stability and economic growth. Crypto can be an innovative solution, provided that regulations are respected and cooperation with competent authorities is sought.