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Raising prices for commercial property is a problem for investors

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Janet Yellen unleashed her price alert a day before she stepped down as Federal Reserve Chairman in February. Her successor, Jerome Powell, remarked this fact a month later.

Analysts from Goldman Sachs made an attempt in May to describe the situation in figures. Commercial properties may be overvalued by about 16%. Well Fargo made a statement that the deals that are ahead of them for new retail space are extremely uncomfortable for them and that is why they are withdrawing. Over the last month, creditors like the U.S. Bancorp and KeyCorp also raised their concern about prices.

Years of economic growth and easy financing pulled the prices of office buildings, apartments and warehouses to record levels. According to some analysts, there is a concern that prices will continue to grow, saying some buyers are catching up with high prices too bold and that they can keep up the pace.

It looks too much as a bubble?

Typically, banks at this point press the brakes and the market is cooled down. But since the financial crisis in 2008 (when banks became more disciplined), other lenders have entered the market and cash flows have remained unchanged. These flows include billions of dollars in debt. Some of these creditors continue to have strong competition at aggressively low interest rates and tight financial conditions. Now some banks under pressure from competition have loosened their standards.

And while debt-trading funds take over ...

Banks are lagging behind ...

The possibility of cheap debt helps investors to increase the price. This is most easily seen in the interest they capitalize on. Briefly: Interest is the real expression of return on investment in real estate. Divide the net operating income (less costs) into the value of the building or property. And these values decrease considerably for most video properties.

High prices are also supported by the low supply of many of the markets, which is characterized by a dramatic decline in construction activity after the financial crisis. Over the last decade, the low level of new construction has helped maintain the high level of habitation in properties of these types.

In other places, however, supply also overcame demand. This is the case with apartment buildings. Rents in many of the big cities are flattening. This is caused by a variety of cases, but in most cases it is because landlords can not afford that much more.

This does not mean that the financial industry leaders say there is a crisis. Simply the number of transactions for commercial properties will decrease in the current environment.

Source: Bloomberg Finance L.P.

Graphs: Used with permission of Bloomberg Finance L.P.

Photo: Unsplash

 


 Jr Trader Martin Nikolov

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