Are There Warning Signs For A Hot CRE Market?
Coming off its second-strongest January ever, the national market in commercial real estate looks as robust and promising as it ever has. But are signs of a downturn hidden in all the good news?
Real Capital Analytics SVP Jim Costello thinks there are. Costello has identified a series of warning signs in the national CRE market that he believes foretell bad news for national commercial property as an engine of profitability. They include:
- Deal volume year-over-year is lower (-7%), despite big gains in the total number of dollars changing hands (+12%). Costello cites the momentum in the lost volume, making it harder to perform the comps that ultimately inform and inspire so many new deals in CRE.
- The transaction types lend to the alarm, according to Costello. He cites a significant 42% of the market was taken up last year with transactions at the “portfolio-level” or “entity level”, where aggregations of properties hit the market together. He cites the sale of individual buildings as the “bedrock” of the CRE market, and points to such a large portion taken up with stratospheric marriages of big capital and big portfolios as a negative for ongoing growth. He further cites that individual building transactions were down 18% from the previous year.
- CCAR testing regulations for banks servicing secondary and tertiary markets made Costello’s list of negative indicators, where capital adequacy testing imposed by Dodd-Frank could add to the worry of creditors contemplating financing of commercial transactions and projects in these smaller markets.
Not a doomsayer roaming the land in sackcloth and ashes, Costello cites the US commercial property market as the fastest growing and most stable in the world and predicts the markets will perform as a “bond equivalent,” attracting capital from around the world seeking safety and performance. But with numbers as high as they are, Costello’s cautious* voice could find validation in a market that shows any signs of getting away from its fundamentals.
*EDITOR’S NOTE: While Jim’s findings do sound a note of worry, calling his perspective “bearish” is overstating it. We’ve changed the description to “cautionary.”