The signs are mixed. The prices for commercial real estate have remained stable throughout the United States, particularly in high end markets, like New York City office and apartment building prices. But the newest figures from Real Capital Analytics Inc. are in for volume, and behold, there has been a definite downturn.
U.S. Commercial Real Estate Sales
February 2015 February 2016
$47.3 billion $25.1 billion
That February dip (January 2016 sales were $46.2 billion) is making real estate analysts ask this important question: Was this February dip just a one-time blip on the market or is it the beginning of a downward trend in volume?
Prices remain steady, which seems to point to a more bullish market.
The commercial real estate market is not monolithic. Commercial real estate is comprised of office buildings, retail and manufacturing facilities as well as apartment buildings. Upon closer examination, certain segments of commercial real estate appear healthier than others in terms of sales. Hotel sales prices have dropped by 10% since last February. This segment, then, is not just experiencing volume drops but price drops. On the other hand, apartment rents have remained steady and are even increasing, indicating a strong interest in apartment living and a strong future marketability of these properties.
Uneasiness about commercial real estate’s stability affects not just the properties themselves but the investment market, too. This uneasiness is combined with the overall higher debt costs outside of the United States, as the US remains an outlier in terms of low interest rates (along with Japan). Economic pundits are carefully watching both real estate investment trusts (REIT’s) as well as any mortgage backed securities (MBS) comprised of commercial properties. It appears that the volume of commercial MBS will drop significantly, perhaps as much as 30%, based on lower investor demand.
One more caveat: MBS mature every year. There is a distinct possibility that the MBS that “come up” this year will flounder for financing in the current market, which could have tremendous ripple effects throughout the financial industry.
As we know, economic predicting is more often an art than a science. But the continued good health of the commercial real estate market affects the entire financial body of U.S. markets, including real estate, investing and banking.