Is the Commercial Real Estate Market Poised For a Fall?
There are economists and business analysts warning that the credit crunch is putting a damper on the commercial real estate market and prices for these properties could drop 5 to 15 percent over the next year. With all of the high priced deals that have occurred during the last couple of years a plateau was expected and the liquidity issues are obviously expected to impact the market, but a 15 percent drop in the sales value of commercial real estate. That I am not expecting.
I could see the top end of the market that has been red hot have a pull back, but that is also a function of a market that has gotten ahead of itself. But the typical industrial and business park properties taking a big hit, that I will not be expecting. Mainly because commercial real estate is as much a function of the economy than speculation. If businesses need to expand they will rent or buy space. If they need to contract, then the space hits the market.
Credit markets will affect the speculators and the mega-deals we have been seeing. But for the ebb and flow of typical Main Street and industrial commercial property look to economic indicators before you look at the credit markets.
Average prices for commercial properties might drop 5 percent to 15 percent in the next two years depending on the type of property and its quality and location, said Matthew Ostrower, an industry analyst at New York-based Morgan Stanley, the second-largest U.S. securities firm by market value.
Commercial mortgage rates have climbed as defaults rose in the subprime part of the residential real estate market. About six months ago, a 30-year commercial loan with 5 to 10 years of interest-only payments would have cost the borrower about 120 basis points more than the yield of the 10-year Treasury note. A similar loan would now cost about 160 to 200 basis points more than the 10-year Treasury’s yield of 4.6 percent, data compiled by New York-based Cushman & Wakefield Sonnenblick Goldman show. Bloomberg.com: U.S.
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Comment by San Francisco attorney on 5 September 2007:
Hi, interesting blog. Thanks for the read!
I just noticed in today’s headlines that the Realtors pending home sale index fell by 12.2% for July 2007. This is a huge drop especially considering that most economists thought it would only be off by 2%.
Today I noted in a San Diego real estate broker’s blog (http://www.brokerforyou.com/brokerforyou/) an interesting post about this as well as some really eye opening statistics for the San Diego real estate market.
You definitely want to view the chart posted on August 27th showing the one year value decline for condominiums in the San Diego area. This chart shows that in one zip code, values were off by over 34.2% in just this time period. When one considers that the top of the market was actually sometime around the summer of 2005, there is a good possibility that before this is over, some real estate values could be off by 50% or more from their peak.
San Francisco attorneys
Comment by David Stejkowski on 6 September 2007:
I agree. I still see this as a return to normalcy rather than the rampany speculation that had buyers taking deals at 5 caps. The sky is not falling — yet. Because of high debt costs you will see fewer portfolio deals but continue to have single asset action that can be refinanced into the CMBS market when Libor contracts come back down to earth.