Saturday 15 July 2017

Where in the cycle is US commercial real estate

I had previously suggested that due to various cyclical and structural reasons US core commercial real estate could halve in value. But I didnt provide any time frames. So question is are we near a peak? At what point may it start to roll over? What could be the catalyst?

A few charts:

Delinquencies are at a record low:

The Greenspan housing bubble is pretty obvious, but bank lending to the space has been somewhat subdued since the GFC, as you can imagine:

Yields are pretty low, and the Fed, in my view, is now hiking until there is a recession:

The developers are all fired up:

With lower residential building levels the combination of commercial and residential investment is not looking like a construction activity bubble, in aggregate, which comes back to valuations being squeezed higher and curtailed bank lending:

 Here is the killer, valuations are at cycle highs and even dipped in Q1, historically
valuations never really got that far ahead of the GDP growth.

So with overall high valuations, a large slew of supply coming, the Fed hiking and low growth, seems likely the timing is near. Hard to see a blow off top from here, these are boring bricks and mortar assets, hardly concept company unicorn territory.

Given the illiquidity of the asset class and the time and cost taken to get out, its probably already past the time to get out.

As we have seen with global super prime resi, it just took an administrative measure in China to freeze a set of wildly overvalued markets.

In US commercial real estate perhaps Fed hiking expectations are the trigger to freeze the market, perhaps its a few buildings delivered unrented, or perhaps its a few fire-sales, perhaps some downwards rent reviews.

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