Commercial real estate trends point to prices falling by as much as 5% in the next 12 months.
A storm is brewing, creating a tsunami of issues for the commercial sector. The global surge in U.S. property investments that drove record values in years passed is expected to wane alongside lower oil prices and disjointed debt markets. Property sales by publicly traded landlords, debt maturities, and tightened regulations are furthering the trend. The instability is creating a volatile commercial real estate selling atmosphere, with uncertainty about U.S. policies following the presidential election worsening matters.
Let it rain
Commercial mortgage-backed securities (CMBS) float amidst a tumultuous market in which borrowing costs for landlords are higher, inhibiting future price growth. Properties in small cities, dependent on Wall Street banks for funding, have been hit especially hard – a global market rout in February sent prices plummeting after Wall Street dealers were unable to provide liquidity when hedge funds were forced to sell CMBS holdings. Regulations such as Dodd-Frank are also not helping the situation, making it increasingly expensive for banks to hold securities.
The market has shown signs of cooling since the start of the year, with commercial property values in big cities declining 3% in just the past 3 months. New York, the biggest market, is forecasted to decline as much as 30% over the year. Even REITs (real estate investment trusts) are being affected, with shares trading at prices that undervalue holdings (shopping malls, office buildings, hotels, etc.), leading them to become net sellers.
Despite the expected downturn in commercial real estate trends, the sun could break through the clouds, presenting new opportunities in the form of bargain prices for investors, and opening opportunities for investors to bail out borrowers who’ve come up short.
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