Pacific investment Management Co (PIMCO) has been waxing lyrical on both the US commercial real estate market and a potential triple whammy just around the corner. After six years of sustained growth it looks as though commercial real estate prices in the US could come under significant pressure. When you bear a mind that real estate is a major element of any economy this is not a good sign for the US economy in the short to medium term.
So, what is this triple whammy around the corner?
In the short term PIMCO believes that a mixture of tight regulations, debt maturities and publicly traded landlords reducing their exposure could see US real estate prices fall by as much as 5% over the next 12 months. While 5% may not seem to be a particularly hefty fall it would bring to an end a six-year period of sustained growth for US commercial real estate and likely put more pressure on the economy.
This comes at a time when the US economy itself is already under pressure with some analysts suggesting an expected short to medium term increase in US base rates could be more gradual than first thought.
Is the US paying for recent over exuberance?
There is a feeling that maturing debt from the last decade will cause disruptions in the worldwide money markets which are already under extreme pressure. It would seem that the over exuberance of the last decade, with enormous debt taken on by property investors, could come back to haunt the US market.
While the short term outlook may be a little depressing for the US commercial real estate market this could inadvertently create opportunities for forward thinking investors. If, as many expect, there are limited opportunities to roll over debt maturities during the next 12 months then some investors may be forced to jettison their property assets at “attractive” prices.
Will investors hold back in the short term?
While this PIMCO report has grabbed the headlines it would probably need a significantly larger number of similar reports from other third parties to have an immediate impact upon property investors. Just recently we saw talk that US base rates could increase in the short term which indicated a stronger than expected economy and the need to rein in excessive lending. However, if this increase in US base rates turns out to be more gradual than people had first thought this could indicate lowered expectations for US economic growth.
There is so much political and economic uncertainty around the world that it is not difficult to see why some investors may become a little more cautious on US commercial real estate. Indeed we have the forthcoming UK referendum on EU membership which could send ripples of concern right across worldwide investment markets. Even if the UK does vote to remain part of the European Union the ramifications of this referendum could still be far-reaching.
When you bear in mind that US commercial real estate prices have increased significantly over the last six years perhaps now is a good time to take stock and review the situation?