In a recent article by the Wall Street Journal, there's been a surge in commercial real estate prices, which has caused some real estate financiers to be worried about the housing bubble. This demand for commercial property has been compared to the boom of the mid-2000's.
Investors have been pushing up commercial real estate prices over the last five years creating the possibility that the global commercial market is overheating. According to the report, "the value of US commercial real estate transactions in the first half of 2015 jump 36% from a year earlier to $225.1 billion ahead of the pace in 2006."
Low interest rates as well as liquid cash make commercial real estate very attractive and comparable to bonds and other assets. US investors have increased their real estate holdings as well as foreign investors become more fixed on the US market. This demand for commercial property is similar to the boom that we saw in the mid-2000, which of course busted around 2007.
The real estate recovery, which began in 2010, continues to grow rapidly over the last year or two, so much so that it may be a bit worrisome for financial advisors and commercial real estate investors. If too much capital comes into any asset class, it may not be a good thing for years to come.
Those that regulate the markets are monitoring it closely and the Federal Reserve stated that "valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly."
In addition to the demand, interest rates continue to be historically low, which appeal to commercial real estate investors, especially in major cities that continue to grow. Banks have urged income minded investors into a broader range of riskier assets.
This isn't news just to the US, however, as all over the world in foreign markets property values have continued to peak. This also is not quite as dramatic as the real estate bust. Commercial real estate prices as well as the sales volume plummeted after 2007 and after 2008 but begin to rebound in several major markets such as New York City and Washington DC. Investors have been buying multi family properties on the assumption that the housing market would result in a surging demand for rental properties, which it has.
However many real estate analysts warned the property values could plummet if the interest rates rise sharply. The Federal Reserve has hinted that interest rates will increase later 2015 even though many people feel that property values might not necessarily be hurt because they will accompany higher inflation allowing landlords to raise rents.
"The Federal Reserve and others have noted that banks have been loosening their lending standards. Banks had $1.7 trillion worth of commercial real estate loans outstanding at the end of the first quarter of 2015." New issues of commercial mortgage backed securities are on target to reach about $110 billion this year. [Source]
For more information on commercial real estate, especially those investors in the Minot area, please contact the Signal Team today.
Thank you to Tina Droessler for her contribution to this weeks commercial real estate blog. Tina and her team work in the Palm Desert real estate market and assist buyers and sellers with their real estate needs.