According to Pacific Investment Management Co (also called Pimco), commercial real estate prices in the US might fall by as much as 5% in the next year. The fall can be attributed to tightened real estate regulations, property sales by real estate companies and corporate debt maturing in the next 12 months.
The US commercial real estate market has done quite well in the last few years, bolstered by easy money provided by the Federal Reserve’s quantitative easing program. But the Fed, under Chairwoman, Janet Yellen has slowly squeezed the quantum of funds.
Global buyers were one of the biggest investors in the US commercial real estate market but even they have reduced their participation in the market. The slowing growth of the Chinese economy, the disoriented debt markets and the low crude oil prices are other factors that have impacted the growth of the US commercial real estate market.
However, the real estate shakeout is not all bad news. As the prices fall, some companies will be able to snap up attractive properties at bargain prices. In addition, as debt from the last decade starts maturing this year, companies willing to finance borrowers who are facing a shortfall in funds will also make a killing. So for those with funds to spare, this will be a good storm indeed.
Real estate markets have already cooling off across the country. Commercial real estate prices in big cities have already reduced by as much as 3% in the last three months. Brokerage firm Cushman & Wakefield has reported that real estate transactions in New York, the largest property market in the US are expected to reduce by up to 30%.
The confusion in the commercial mortgage backed securities market has also contributed to the gloom. Banks are not buying as much of these securities as they once did. The Dodd Frank Act has seen to that.
Hedge funds were also forced to sell a large amount of these securities in February, on the back of a global fall in prices for such debt. It pulled prices for debt further down, leading to a higher borrowing costs for real estate companies and preventing real estate prices from appreciating. This was especially true for commercial real estate in the smaller cities, more so because many of them were dependent on Wall Street for financing.