The Federal Reserve has a new item to worry on its plate- commercial real estate. This is a valid reason for worrying, with the numbers backing up such an assumption. The current boom in constructing apartment buildings in 2017 continues to be strong. A new record consisting of about 346,000 new apartments will be offered for rent in buildings which have 50 and above housing units. The numbers are clearly excessive, deliveries will be about 21 percent more in 2017 when compared with 2016. Records have been also set in 2015. During the pre-financial crisis period from 1997 to 2006, annual completions clocked an average of 212,740 units. It will be 63 percent higher in 2017.
These numbers are not inclusive of condominiums. This statistic is not included even though investors buy up condos and rent them out, thus populating the rental market. The numbers are also not inclusive of buildings containing fewer than 50 units. This is most prevalent in the biggest metros. It is to be remembered that the metro population varies wildly.
The incessant construction of huge apartment buildings has begun to take effect on the rents. The average asking rents in all of the 12 most expensive markets have dipped from their peak highs. They have dipped by double digits in a number of markets. The list of such latter markets includes Chicago, New York City, Honolulu, and San Francisco.
Building prices and recession
Building prices have been impacted as well. Apartments comprise a large chunk of the commercial real estate. They are also highly leveraged. Fanny Mae and other government-backed enterprises guarantee the commercial mortgages on the apartment buildings. They are then packaged into Commercial Mortgage Backed Securities. It follows that the banks, along with the taxpayers, are also on the firing line.
The problem is that nothing is being done from the time of the Great Recession. Green Street created Commercial Property Price Index or CPPI tracks prices at which transactions in commercial real estate are presently being contracted and negotiated, went on a plateau for a short time from December to February. It has, from that time, begun to decline. Within June, it went below the June 2016 levels. This is the maiden 'year over year' decline from the time of Great Recession. Mall property prices dropped by five percent. Retail strips went down by four percent and apartment building prices went down by three percent year over year.