Saturday, July 23, 2005

Commercial Real Estate Bubble

There have been a lot of articles recently about the commercial real estate bubble. I guess using the logic of residential RE bulls, "supply is tight and there is huge demand, everyone wants to work here, they're not making this anymore", etc. Well, at least when jobs do in fact increase the workers will have a place ready made for them to work in.

[Personally, I think we in the US would be much better off if we were less well-off.]

Some quotes:

"In recent weeks, the feverish residential market has spurred incessant talk about the prospect of a housing bubble. But prices for commercial real estate have also been going through the roof, despite high office-vacancy rates and lackluster job growth."

"Some investors think that commercial real estate is enveloped in a bubble of its own."

"Others wonder if there could be a return to the early 1990s, when huge fortunes were lost as many landlords were forced to turn over the keys to their buildings to their lenders."

"For several years, prices for office buildings have continued to rise steadily, even though vacancies in many cities have remained high."

"From January through May, more than $32.4 billion worth of office properties valued at $5 million or more changed hands, up 41 percent from 2004, according to Real Capital Analytics, a New York research company. The average deal size increased 22 percent, to $37 million, the company said."

"Some sophisticated investors are sending strong signals that prices cannot rise much higher."

"Calpers, the nation's largest pension fund; Equity Office Properties, the giant real estate investment trust; and private landlords such as the Shorenstein family of San Francisco are among big sellers that have been shedding billions of dollars worth of office and retail property in recent months."

"Jim Titus, managing director of Realpoint, the research arm of GMAC Institutional Advisors, observes that today's prices are reminiscent of the late 1980s, when Japanese investors overpaid for trophy buildings and went on to suffer huge losses. "I sort of see a similar situation potentially brewing," Titus said."

"Commercial real estate is awash with capital, and many buyers are accepting initial returns of 5 percent or even less because they have few investment alternatives."

"Once interest rates rise and investors can buy 10-year Treasury bills with a 5 percent yield, real estate will seem less attractive, Titus said. "That can have a real impact on valuations in the marketplace.""

"Nationally, the average office vacancy rate dropped half a percentage point from the first quarter this year to the end of June, from 15.9 percent to 15.4 percent, but in many cases, Lynford said, "the cash flow has been deteriorating," because rents are not improving"

"The volume of outstanding commercial mortgages has been growing and the total is now equivalent to 14.4 percent of gross domestic product, a level not seen since the days before the real estate crash of the early 1990s, according to Moody's Investors Service. As with residential real estate, the proportion of interest-only loans has risen sharply."

"Green Street calculates that the value of property owned by real estate investment trusts has risen 27 percent since 2000, while home prices have shot up 51 percent. This suggests, the company said in a recent report, that "homes have a much worse case of bubblitis than commercial real estate."


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