We expect rising interest rates and structural headwinds to trigger a deep rout in commercial real estate. The impacts on the real economy will be mostly indirect via the impact on small bank lending, however, rather than the direct impact on construction and development activity. While residential investment accounted for 6.5% of GDP at the 2007 peak of the housing bubble (and bottomed out at little more than 2% a few years later), non-residential structures investment is only 2.6% of GDP now. Moreover, investment in the most-affected office and retail sectors, which face the biggest headwinds from the shift to working from home and online selling, together account for less than 0.5% of GDP. In addition, rather than contracting, non-residential construction spending has been growing strongly of late, driven by gains in manufacturing and non-retail commercial, such as warehouses. Most remarkably, even office and retail construction spending has rallied, illustrating that the direct impact from the coming commercial real estate slump will be limited
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