The eight-year boom in commercial real estate has raised more than a few eyebrows recently, including the Federal Reserve Board, which has indicated it is a driver in its decision for pulling in the reins of monetary policy, citing the size of the sector, its leverage, and what it did to the banks during the Financial Crisis.
Agents who work in the CRE segment need to consume data and be ready to make moves to stay ahead of potential shifts in the market. According to a Wolf Street report, the trend now sees commercial real estate prices on the wane, citing the Green Street Commercial Property Price Index, which tracks the value of property owned by real-estate investment trusts. The index fell 0.4 percent in May to its lowest level since May 2016. However, the current trend is not an indication of a looming crisis. It actually is a slow process that is happening despite near-record low long-term interest rates, high levels of liquidity in the markets and buyer-friendly financial conditions powered by yield-chasing investors blind to risk.
Fueling the decline in commercial prices is a sharp decline in the values of retail malls, hit hard by store closings and bankruptcies of tenants as brick-and-mortar retail continues its decline. A Green Street sub-index for malls fell 2.8 percent in May and 5 percent for the past three months. Moreover, it also is down year-over-year. Apartment buildings also are soft. One bright spot is industrial space, including warehousing, which benefits from the shift to online retailing.
Boston Fed President Eric Rosengren, one of the earliest advocates of unwinding QE, started warning about the CRE bubble in 2016 and he has been beating the drum over the last year.
The “significant decline in collateral values” of both commercial and residential real estate was “the root cause of the financial crisis,” he said.
Financial institutions today hold $3.8 trillion in CRE loans.
Throughout the industry, the downturn was not unexpected for a segment like CRE, which runs in cycles of booms and busts. Green Street’s Jim Costello notes transactions show the picture, dropping 17 percent over the first four months of 2017, compared to last year.
“Those participants focused on the priciest deals are facing the biggest challenges in the current market.”
However, Costello wasn’t all doom-and-gloom, much to the relief of many agents. He offered some reassurance, surprisingly, by comparing the current situation to the Financial Crisis.
“Conditions are still far more favorable for the investors active in the $500 million-and-greater space in the current market than in the aftermath of the Global Financial Crisis. Activity for the priciest deals fell from a 4-quarter trailing peak of $231 billion in Q4 2007 to only $1.7 billion by Q3 2009. So, in the current market, it is not like the past where the big game disappeared, there are simply fewer mastodons out and about.”