A Look at the Commercial Real Estate Bubble That is About to POP!

Since the imploding of the Financial Crisis back in 2009, banks and other financial lending institutions have been weary when it comes to lending money to Commercial Real Estate investors. And to be honest…. we don’t blame them, since “CRE loans were in part responsible for the near-collapse of the financial system during the Financial Crisis,” according to Business Insider.

Despite the hesitation to lend to the CRE industry, loans for CRE investments at banks here in the US have reached a high at $4.3 trillion, 11% higher than we saw just before the imploding of the United States Financial system. Since this peak back in 2016, CRE prices have been reported to be flat-lining, malls and traditional retail are seeing the worst of this outcome.

Not only is traditional retail being affected, but so are offices and lodging buildings across the US and many Federal governors agree that the elevated prices in CRE are threatening “financial stability” because of the leverage and its connection to banks. These prices collapsed nearly 40% back during the Financial Crisis of 2009 according to the Green Street Commercial Property Price Index (CCPI), but began to peak back in September of 2017, 27% above the peak before the Financial Crisis, but since then this peak has shown a decline, dropping 1.7%.

The chart below shows the 8 year boom that has recently began to decline:

Out of the 5 major CRE sectors that make up CCPI, one is on the rise, while one sector continues to plummet. “Which sectors are these,” you may ask? Well it appears that of all 5 sectors, industrial seems to be performing the best, up 11% in March from last year. This sector includes the recently made popular warehouses and fulfillment centers, thanks to e-commerce giants like Amazon.

 

The retail sector is being hit the hardest, let’s split this sector into two, strip malls and malls. The sub-index for strip malls dropped this year nearly 5%. Seeing it’s last peak back in 2016 but overall dropping a total of 8% since that time. Malls on the other hand has been hit the hardest out of the two, dropping over 14% in the last year.

 

For a more in-depth look at the state of each sector read Business Insider’s article, A Bubble in Commercial Real Estate May Be About to Pop.

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