Is commercial real estate the next bubble to burst?
This is a textbook case for the Austrian business-cycle theory: Artificially low interest rates and loose money produce overinvestment, by both bankers and builders, in a bubble — this time, offices, apartment buildings, and retail space — that can’t be sustained once the artificial stimulation comes to an end, as it must. In this case, that malinvestment has to be worked out at two levels: At the financial level, among the lenders and borrowers, but also at the physical level: There’s going to be a lot of dark storefronts out there, with serious long-term consequences for nearby neighbors and for local real-estate markets: Foreclosures will put more property onto the market, driving down rents and subsequently making existing loans less tenable as the cashflow of commercial properties is diminished. They called the Depression-era tent cities “Hoovervilles.” The next time you see a mile of half-abandoned strip malls, think “Obamaville.”
This is just one of many things that could happen this year that will crater Obama’s reelection hopes.
I am noticing a lot of building out here in Silicon Valley even though there is still a LOT of empty space in existing buildings.
The Murky News had an article about a high tech employment boom in Silicon Valley resulting in the building boom. I haven’t seen much sign of it, but I haven’t been looking very hard. There are certainly lots of empty office buildings, some of them built before the previous recession.
I’ve been hearing some dire predictions from people in the commercial real estate market for a couple of years. The feeling is that there’s a shoe that’s going to drop, then we’ll feel some pain. I doubt it will be even remotely as bad as what happened in residential, but it could be a recession trigger.
I think it is a different dynamic. There is not a lot of speculative buying of commercial properties by any but the super rich. So the few speculative buyers will lose the shorts, but businesses (the entities that actually use commercial properties) typically don’t speculate on property – they lease it. So while ownership of the properties will change hands, the occupancy rate will not change.
Additionally, no businesses have used crazy mortgages to get into places they can’t afford. So when the crash comes, the businesses just shrug and keep paying the same lease rate that they have all along…
The change in occupancy rate of commercial real estate is directly due to the oppressive environment for small businesses that the Democrats have created. It has nothing to do with commercial real estate.
A few years ago (after the housing bubble popped), there was a lot of commercial building construction going on here in Colorado Springs. Today, a lot of those buildings are sitting empty or with minimal occupancy. At the same time, there are a lot of empty commercial buildings (office space and retail) and they were empty while those new buildings were being built. Someone has lost a lot of money but I don’t know who holds the mortgages on those properties but with no income coming in, they’re losing a lot of money each month.
Same thing happened here. Labor and materials were cheap and interest rates were low so people started building thinking the poor business climate wouldn’t last more than a few years. The thinking was that even if the building sat empty for a few years it would still be cheaper than building later. Not sure how that worked out.
Here in Sack-a-tomato, California, it looks like a commercial real estate bubble has already popped, with a sudden increase in the number of recent storefronts a couple years ago. At the same time I see major building projects that look like apartment buildings.
I’ve seen a fairly large apartment complex under construction but that may make more sense than building office or retail space. From local reports, fewer people are able to buy homes because they don’t qualify despite it being a buyer’s market with low interest rates and housing prices are low. They have to live somewhere and rental occupancy is up.
Lots of commercial construction ongoing here in Calgary, but we’re not suffering many of your problems down south. Business is doing pretty well right now.
Good luck with it, but I’ afraid not much will change until the Dems are gone.