Commercial Real Estate Boom Turns Bust As Pressure Piles On

After collapsing during the financial crisis, commercial real estate (CRE) has enjoyed a decade-long boom. Fueled by historically low interest rates, the sustained CRE bull market has seen prices hitting all-time highs from Asia to the Americas and beyond. However, clouds are gathering on the horizon as overbuilding concerns are rising in Asia while economic slowdowns threaten Europe and North American CRE markets.

Around the world, city skylines are dotted with dozens of cranes, a tangible symbol of the world’s enormous investment in commercial real estate.

Encouraged by a decade of ultra-low interest rates, CRE developers have built hundreds of skyscrapers, tens of thousands of luxury apartment units, and millions of square feet of office space in the world’s major cities. However, various unfavorable developments now jeopardize the CRE boom.

Retail apocalypse

Across the US, the UK, and many other countries, retail chains have been closing at an accelerated pace. High profile bankruptcies have shuttered anchor stores in malls across North America and elsewhere as changing consumer tastes and the rise of online shopping have slashed sales in traditional stores.

The impact of the retail crunch has been uneven. The UK has been particularly hard hit – an estimated 29,000 retail units have been vacant for more than twelve months – while some parts of Europe remain relatively unaffected. However, at the industry level, retail bankruptcies and store closures threaten rental income for CRE managers and have dented confidence in the retail real estate subsector.

Luxury apartment bust

Over the last ten years, the liberalization of global capital flows and rising wealth in emerging markets has led to the creation of a luxury apartment bubble in many global cities. Wealthy investors in China, India, and elsewhere were invited to purchase units in luxury buildings in cities such as London, Vancouver, Sydney, and New York. Developers promised quick, double-digit returns and housing prices in these cities soared as foreign capital flowed in.

However, local housing markets proved, in many cases, unable to sustain those high prices and thousands of luxury units today sit empty. StreetEasy estimates that over 25% of the units built since 2013 remain unsold, including up to 40% of the ultra-luxury units on Billionaires’ Row.

As a result, many investors have been forced to sell at a loss, and governments came under pressure to stem housing price rises through punitive taxation and other measures. Today, thousands of luxury apartments sit empty in global cities while homelessness has risen.

Asian slump

Massive construction in Asia, particularly in China, has been fueled by both rapid economic growth and historically low rates. However, as growth in Asia slows in the face of trade disruption, heavily-indebted CRE developers are struggling to fill their malls, offices, and apartment blocks and generate the rents they need to service their debts.

Together, these developments are putting pressure on CRE developers and investment funds. Capital inflows into the sector remain relatively robust, but a growing number of high-profile projects have been put on hold or have struggled to sell or find renters.

With interest rates set to remain low – the European Central Bank and US Federal Reserve are both loosening monetary policy in anticipation of an economic slowdown – the risk of a credit crunch in the sector looks limited. Nevertheless, many believe that the prospects for attractive returns in CRE are crumbling.

Intuition Know-How has a number of tutorials that are relevant to real estate. Click on any of the links below to view the tutorial intro video.

  • Real Estate – An Introduction
  • Real Estate – Investing
  • Real Estate – Valuation
  • Asset Classes – Primer
  • Asset Classes & Investing
  • Asset Classes –Types