Commercial Real Estate Crisis--Yes or No?

Deal Junkie linked to the Economix blog today, which has a post arguing that fears of a commercial real estate crisis are overblown.

But in fact, non-residential building fell far behind housing construction during the housing boom. This shortage of commercial buildings relative to housing suggests that a commercial real estate crisis will not occur, or that at worst it will occur with much less severity than did the housing crash.

While there is much disagreement as to the proper remedies for the current economic situation, there is wide agreement that the housing boom and crash that followed were the major factor in putting us where we are today. These days, “real estate” is a term that provokes fear, not optimism. Nevertheless, it is a mistake to assume that commercial real estate shares the housing sector's ailments.

Click here to read more.

I think a problem with this analysis is that the thesis is entirely based on one set of data--the Bureau of Economic Analysis' inventory of housing and non-residential structures compared with the 1990-2000 cycle. What that line of thinking ignores is the relative states of residential and commercial real estate in the 1990s vs. the 2000s. Furthermore, it doesn't tell us anything about the changes in how commercial real estate was financed in the past decade vs. the 1990s, nor the difference in cap rates or in fundamentals. A real problem for commercial real estate right now is the fact that tenants are dropping leading to higher vacancies and lower rents. That's not the assumptions investors were making when they bought the properties nor is it what lenders were thinking when they provided financing. It also ignores the fact that right now the economy is in the worst post-war recession. That can't help but to have effects on commercial real estate.

Meanwhile, Square Feet points to the latest MIT Commercial Real Estate Transaction Based Index results. The index tracks prices back to 1984. In the 4th quarter of 2008, the index fell by the largest it has ever fell in a single quarter, 10.6 percent.

You can view the latest charts below.


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