(Bloomberg) -- Commercial real estate could face the next crisis of confidence after last month’s jitters in the banking system, according to Paul Marshall, who leads one of the world’s biggest hedge fund firms.

While the collapse of Silicon Valley Bank was swiftly contained, it has pushed lenders into “self preservation mode,” the Marshall Wace founder said in a letter to investors this month, a copy of which was seen by Bloomberg. 

Lending in general will get even harder to access in a “zombified banking system” and credit quality is set to worsen, Marshall wrote. Commercial real estate is under particular strain from tighter financing and pressure on rents, Marshall argued.   

“We are now likely to experience a fairly severe credit crunch which significantly increases the risk of recession,” Marshall said in the letter. “Commercial real estate, and especially office property, is the next shoe to drop.”

A spokesman for London-based Marshall Wace, which manages about $62 billion, declined to comment. 

His warning follows worldwide concerns about the health of commercial real estate sector, which is being roiled by rapid rate hikes and vacancy rates that are struggling to recover from the pandemic. 

Marshall Wace’s flagship Eureka hedge fund, overseen by Marshall himself, was net short the real estate sector at the end of March, according to the letter. The fund gained 0.5% last month, while the firm’s Global Opportunities fund soared 5%.

“Commercial real estate is a leveraged construct that relies on cheap financing to create a carry on the rental income stream. This is now being impacted on both sides,” Marshall wrote.

©2023 Bloomberg L.P.