While industry publications are all over the board on the current climate of commercial real estate – according to 62 percent of Capstak users surveyed, the commercial real estate industry isn’t in a bubble.
But, where exactly is the industry going? Here’s both opinions:
The Fed is a notable naysayer, going as far as calling commercial real estate an, “area of growing concern” in their semiannual Monetary Policy Report. The financial times recently reported Mary Ann Scull, chief executive of Maryland-based Howard Bank, as going on record saying, “The wound has healed, the scab is gone, and we [as an industry] are thinking this isn’t such a bad asset class after all — but we often have shorter memories than we should.”
Reuters echoes this sentiment, highlighting the fact that around $128 billion of commercial real estate loans are due to refinance between now and the end of 2017. What makes that worrisome to the commercial real estate market is more than one-quarter of those loans went to finance malls a decade ago – which is not a market you want to pick as your horse in the race.
On the opposite end of the spectrum, we have Marcus & Millichap’s CEO, Hessam Nadji. Nadji, just told the National Real Estate Investor that he sees the current commercial real estate cycle as a, “'steady as she goes' scenario.” He notes that the industry is in its seventh year of growth, and, if you look at averages, expansion generally lasts only five and a half years. If you look at that measure we’re overdue for a recession. But, compared to other cycles, job growth has been slower, creating a gradual pace of inflation, which shouldn’t create an overheated economy. A new study from Harvard predicting the next housing bubble seems to agree with Nadji. The study reviewed market cycles since the turn of the nineteenth century, and they predict the next downturn won’t come until 2024.
Another positive factor for commercial real estate, at least in the U.S., is the instability of the European market. From factors such as Brexit and France’s controversial election, investors have been shying away from that market. According to Pensions & Investments, “German and Swiss pension funds in particular have shown a particular taste for core residential and commercial real estate in the U.S. Since the beginning of this year, the European demand has helped to keep the prices of U.S. real estate assets high.”
Potentially, the better question than “is commercial real estate in a bubble,” is, “how much longer will this current cycle last?”