Are dark clouds forming for CRE?

Even before China's stock market began melting down earlier this month and Wall Street became caught in the web of volatility, analysts were starting to sound warning bells about the future of commercial real estate in Florida and elsewhere.

That caution comes despite record low cap rates for sectors such as multifamily, industrial and hospitality, rising rents, lowered vacancies, heightened investment activity and continued demand nationwide.

But considering the varied sources and their pedigrees — Situs Real Estate Research Corp., the president of the St. Louis Federal Reserve Bank and the Real Estate Roundtable, among others — the concerns can't, or at least shouldn't, be ignored.

“...The investment environment is increasingly reminiscent of the heady days in 2007 leading up to the Great Recession,” Situs RERC wrote in its recent quarterly real estate report.
“...One understands the increasing uncertainty facing investors,” Situs, an Iowa-based commercial real estate research firm, concluded.

Federal Reserve Bank of St. Louis President James Bullard went even further recently, fretting in an interview with Market News International that commercial real estate could be an “asset bubble” in the making, fueled by low interest rates that have encouraged risk-taking as investors seek to capture greater yields than those offered by Treasury notes, stocks, bonds, commodities or other investments.

“We're hearing anecdotal reports about commercial real estate markets in major cities, housing prices in major series that sound like they may be excessive,” Bullard told MNI's Steve Beckner in mid-August.

And even industry insiders are beginning to set off alarms. The Real Estate Roundtable, in its recently released third quarter sentiment index, says expectations will be “more moderate” over the coming 12 months.

The public policy group contends industry sentiment stands at 61 out of 100, according to survey results released in July, even though 24% of respondents say real estate asset values will decline between now and the third quarter of 2016.

But the group's Future Sentiment Index of real estate health fell by an even greater percentage, slipping to 56 points on a 100-point scale — off 16% from the third quarter of 2014.