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November 23, 2016

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Real Estate Bubble 2017

by Bob Schwartz

Real Estate Bubble 2017 – Another real estate bubble?

San Diego real estate market forecast - Real Estate Bubble 2017

Now, don’t get super worried about this because I am not talking about the residential real estate market here. What I’m talking about, is the approximate $11 trillion U.S. commercial property sector.

Moody’s investor services recently issued a warning about the increasing delinquency rate in the commercial mortgage-backed securities (CMBS) market. This report indicated that delinquencies of 60 or more days at increased from 4.6% in 2015 to 5.6% in September 2016.

Another major financial rating institution, Fitch Ratings, in its November report indicated that this sector may be a trouble spot. In particular, this report singled out CMBS backed by apartment buildings as security, and also expressed concern about construction loans.

Another indicator of trouble ahead in the commercial real estate market is the Green Street Commercial Property Index. This well respected commercial property index hit its peak in 2007. Then, after you drop the index bottomed out in May 2009, since then the index has gained 107% and now is actually over its bubble high in 2007 by 26%!

Real Estate Bubble 2017

Now, the index has been unusually flat for the past three months, and so far for the year is only up 4.7%. When one looks inside this index at some of the components, apartment building prices were down 1% in the past three months, but up 5% year-over-year. Lodging was down 12% year-over-year and healthcare buildings were also down 1% year-over-year.

Another concern in the commercial real estate market is the fact that in some of the top rental markets such as San Francisco Boston and New York, rents have been under pressure. This combined with the fact that commercial real estate property sales volume was down 8.6% for the first nine months of this year according to one major report, raise red flags that cannot be overlooked.

Now, in the midst of this slowing market, a number of commercial backed securities that were issued right before the big drop in 2006 are now coming due. Originally these commercial backed securities were backed by 10 year loans and insiders project that there are approximately 2.5 billion of these loans now maturing and needing to be refinanced.

One large credit ratings firm is predicting that roughly 40% of the commercial backed securities coming due next year will not be able to be refinanced. If this actually plays out, a large number of office properties and suburban shopping centers will be affected. In the current market of rising interest rates and rising commercial vacancies, it’s not improbable that we will see another bust in the commercial property market in 2017.

If these facts weren’t bad enough, here in San Diego on a number of radio channels, I personally heard commercials for investing in real estate trusts. These REITs that are being pushed on the radio commercials are based on commercial properties. This fact in and of itself would not be of major concern, if I didn’t know about the underlying problems in the commercial real estate market, and personally don’t ever recall REITs being advertised on our local San Diego radio stations. I believe this type of radio advertising for REITs could be another red flag that may come to mark the top of the expected commercial property bubble next year.

From Wikipedia, the free encyclopedia: Commercial mortgage-backed securities (CMBS) are a type of mortgage-backed security backed by commercial mortgages rather than residential real estate. CMBS tend to be more complex and volatile than residential mortgage-backed securities due to the unique nature of the underlying property assets.

**Note – This is just my personal opinion and before making any real estate decision, one should always consult their own legal and financial advisors.

 

Real Estate Bubble 2017

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1 Comment
  1. Dec 5 2016

    good post! Personally, I’ve heard the same radio commercials and agree with you, I think within the year were going to hear about lawsuit by people who bought into the hype.

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