Commercial real estate is starting to cool, with deal volume last year dropping 10% from 2015 to $493.7 billion, while, as Peter Grant reports for the Wall Street Journal and Grant’s Interest Rate Observer, “the early stages of 2017 have delivered even weaker results: $50.3 billion in transaction value through March 1 compared to $80.1 billion in the like period in 2015 (a 37.2% yearly drop).”
One would guess bankers would take notice and turn shy. However, Craig Bender of ING real estate, tells the Wall Street Journal: “The banks are hungry. The life insurance groups are hungry”.
It seems Lord Keynes had one thing right when he wrote, “Banks and bankers are by nature blind. They have not seen what was coming…. A ‘sound banker,’ alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.”
In America’s hottest commercial market, New York, a veritable magnet for hot, cheap, and foreign funds, the first quarter of 2017 was a bust. Large office property sales (those with over 50,000 square feet) that closed in Q1 2017 plunged 63% year-over-year, from $5.54 billion in Q1 2016 to $2.1 billion. It was the lowest transaction amount in any quarter since Q1 2013, writes Wolf Richter.
Not only did the amount of square footage sold nosedive, but the price per square foot fell as well. Richter points out the commercial property bubble has been inflating unabated since 2009. “The big freeze in New York City may be another sign that this bubble too can only go so far, and that peak craziness has been reached,” he writes. “The Fed is now specifically fretting about this commercial real estate bubble, and how to contain it before it takes down the financial system.”
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