Investors Fear the Froth

Investors Fear the Froth

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Like a bad milkshake or a pint poured too quickly, the froth-filled commercial real estate market is now causing concern for investors across the globe. And while the fundamentals driving the residential sector are different this time around (in comparison to 2007) the low capitalization rate and lower interest rate phenomenon is driving transaction volume and sales prices higher, predicated on increasing rents and dare we say increasing occupancy?

market volume chart                         asking office rents

To use an old cliché: experienced office landlords have been to this rodeo before. For those in the multifamily space, you will remember that things got bad for office owners before it got bad for us. And things got much worse for office owners than it did for us. The strong fundamentals in the for sale and for rent sectors of the residential market are encouraging and the trends in the office sector are great for those looking to cash out ahead of what some see as a 5-7 year cycle.

                                                    Fed-Funds-Projections_March-2015

What will be the catalyst to market change this time around? The fed promises a measured rate increase before year end, but that is unlikely to cause panic. Could the second portion of the increase cause our overly active market to come to a halt? Possibly, as it is rumored to be double the original increase (0.39% 1st increase and 0.78% the 2nd). Yes, a 1.17% increase in rates will most certainly slow down deal flow and cause prices to drop. With development activity up across the country and the real estate sector leading recent job growth in many markets, this could very well wipe out our economy’s comeback effort.

One can only wonder if real estate will be the undoing of our economy a second time around, or if there will be another outside factor. We had the dot com bubble in 2000 and the housing bubble in 2007. Will we see a start-up bubble? Will tech again come crashing? Maybe the marriage of new school and old school (tech and real estate) will together wreak havoc. In any case, all eyes are on the fed as we look toward the future.

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