Pacific Investment Management Co or PIMCO has issued a strict warning about the market of commercial real estate market in the United States. In its June 27 report, Anthony Clarke and John Murray of the company wrote on capital flows which had propped up this market. They wrote that the inflow of capital is now decreasing.
Real estate price drop
The Newport Beach-headquartered company has said that real estate prices in the US commercial sector may drop about five percent within the subsequent 12 months in the middle of tightened regulations.
A worldwide demand surge for American property investments which pushed the real estate values to their record highs could wane due to the cumulative effect of lower oil prices, dislocated debt markets and slow Chinese growth. If this happens, they warned, there could be a stop to about six years of continuous price growth. All these are published in the “U.S Real Estate: A Storm is Brewing” report.
According to Pimco, some opportunities can be had during the real estate shakeout. This will permit a few buyers to purchase property at rock bottom prices. In addition, a maturing debt wave from the boom of the 2000s begins to come due in 2016. This opens a window for the investors to fund those borrowers coming up short. The report says that this works well for flexible capital.
Pimco is not alone in coming up with this assessment. The same assessment was arrived at by Deutsche Bank analysts. They had warned about the coming decline in the commercial real estate. They have also noted that the number of measures of actual spending was nearly or even above 90 percent of levels where they went up during the 2002 to 2008 period. PIMCO has observed that the Real Estate Investment Trusts or REITs- have been whipped along with equity market.
REITS are securities which invest in trade like and real estate stocks. They have seen a 71 percent correlation between the REIT and the S&P 500 returns from the start of 2015. The Standard & Poor went up by only 0.3 percent, and REITs have been virtually flat. This has resulted in placing the REITs below the net asset value, thus increasing the net sellers of the commercial real estate.
The market is in turmoil for the commercial mortgage backed securities. This is led to steeper borrowing expenses for the landlords, and inhibiting the future price growth.