If you follow commercial real estate, you probably notice that huge purchases are being made and values are high. These conditions look very similar to that of 2006-2007, which soon came crashing down. However, although experts have been worrying, another commercial real estate bubble does not seem to be coming.
Commercial real estate prices have been rising for at least five years. We saw some potential for an overpriced market in October when some huge, “blockbuster” deals hit the market. In the publicly traded REIT sector premiums to unlevered asset values (UAV) had been escalating for about three years between 2010 and 2013, which shows signs of “overheating” as well.
“Values for institutional quality real estate have doubled in the past six years, and are now 20 percent above the prior peak that the market reached in 2007,” says Andy McCulloch, managing director of real estate analytics at Green Street. “This creates a level of fear, but are we in a bubble? Green Street doesn’t think so.”
Overall, we saw a healthy real estate market in 2015 and will see one in 2016 too. A variety of economic drivers in the United States help the market. For example, low oil prices. Construction and buying will continue at an even, healthy pace. Total construction spending on commercial real estate is projected to be close to $360 billion in 2015, up 12.3 percent from 2014.
If you have been fearing a commercial real estate bubble, your worries should be assuaged, at least for now. As long as credit is used wisely by builders and significant economic drivers positively influence the real estate market, a bubble should be avoided.
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