Commercial real estate is a famously cyclical business. Booms and busts are a part of the landscape. Eight years of near-zero interest rates has resulted in nothing but boom for the sector. Today the WSJ reports some real-estate investors are reducing their holdings and getting more selective about deals. Could this be an early-warning signal of the next bust?
Some prominent real-estate investors are reducing their holdings and getting more selective about new deals, in a sign that the eight-year bull market for U.S. commercial property is coming to a close.
Asset managers at pension funds and endowments, as well as private-equity firms and other big investors, are throttling back on new acquisitions, selling more assets and shifting to less risky strategies as a way to protect against potential losses in a downturn.
Additional selling could put stress on the market because demand for property has started to flag. Commercial real-estate deal volume decreased by $58.3 billion, or 11%, in 2016, the first annual decrease since 2009, according to data firm Real Capital Analytics, a sign that investor appetite is waning.
Caution among investors in the $11 trillion U.S. commercial-property sector is being driven by lofty prices, the length of the market cycle so far and the recent rise in interest rates, which makes bonds look more attractive compared with commercial property. Also, developers are adding new supply of some property types at the fastest rate since the recovery began.
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Jeremy Jones, CFA
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