from Wolf Street:
Commercial real estate prices over the past many years have done only two things, in this sequence: boom at a blistering pace to dizzying heights and then crash violently.
The benign description for this elegant and repetitive process: “the end of the credit cycle.” Credit gets just a little tighter and a little more expensive, as investors are once again opening their eyes to risks and want to be compensated for them at least a little bit. Then cap rates can no longer compete with rising corporate bond yields. The lofty lease rates commercial property owners have been charging and that made all this possible smack into ordinary run-of-the-mill economic ills that cause vacancy rates to rise.
This coincides with a construction boom and lots of supply hitting the market for years to come. Suddenly the entire math, dragged out to prove that there is no bubble and that prices are sustainable, collapses. Then these highly leveraged investments crater under their pile of debt and drag down commercial mortgage-backed securities (CMBS) with them.
Been there, done that.
No one knows exactly when commercial real estate turns from blistering boom to bust, but there is no tapering or plateau, nor a period during which prices take a breather, or suffer even “modest declines,” as insiders have recently envisioned. There is only boom or bust. And when the bust comes, it does so suddenly and relentlessly.
But not yet. November was still the boom. And what a party!
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