After months of optimism, commercial real estate (CRE) forecasters have come back down to earth, with Morgan Stanley predicting no growth whatsoever in commercial property prices this year. The tonal shift is warranted: While rents and prices are soaring in urban areas, CRE is stagnating or even declining in terms of new investment and in most non-urban sectors. In many ways, the trends we’re seeing today are the culmination of nearly two decades of generationally driven migration patterns. Although Boomer youth eschewed cities in favor of rural living, Millennials want to live and work in urban areas—a shift that is triggering a highly focused boomlet that has left most of the rest of CRE untouched.
Over recent months, media outlets have touted CRE’s comeback. And for good reason: Overall prices have skyrocketed—up 93% from 2010’s low and 16% above 2007’s high. At the same time, investors are flooding the market. By the end of the first quarter of 2015, banks had $1.7 trillion of CRE loans outstanding—just 2.6% shy of the record set in the first quarter of 2009.
This growth has been accompanied by a flurry of foreign activity. In 2014, foreign investors pumped $45 billion into U.S. CRE—second only to 2007’s $47 billion. In December, Congress lessened the tax burden on foreign CRE investors, a decision that could boost foreign investment by $20 or $30 billion a year. U.S. CRE looks like a good bet for investors from emerging markets such as China—which is already seeing capital flight thanks to its own economic woes.
Higher prices and rents in prestige urban areas have attracted the most attention. Young, high-income professionals are fueling growing demand for multifamily units. Commercial property price indexes for apartments are at 294 today—up 180% from 2009’s low. Meanwhile, prices of office buildings in central business districts rose 115% to 245 in the same period. In some cities, it’s hard to keep up. New office space construction in Manhattan, for example, was projected to reach 4.3 million square feet in 2015—a 79% increase from 2014 and the highest level in 25 years.
Read Full Story: The Reality Of The Commercial Real Estate Boom
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