Much of the slowdown has nothing to do with Trump. Concern is mounting that real estate prices have peaked following six years of record-shattering growth, and there are signs of overbuilding in large cities such as New York and San Francisco—the biggest beneficiaries of the recent boom.
Let’s take a look at weighted-average asking rents for office space for the lowest 35 metro areas in terms of rent growth from 2016 Q1 to 2017 Q1. Silicon Valley leads the nation in largest asking rent decline (-12.19%) since 2016 Q1 while Midtown New York actually grew 0.40% over the past year. Suburban Maryland (-3.23%) and Northern Virginia (-0.25%) both saw declines in asking rents.
Here are the top 35 Metro area in terms of percentage change in asking rents. Notice that while Manhattan asking rents are flat to falling while Brooklyn asking rents rose 16.51%. Same story holds for Silicon Valley (aka, San Jose). Silicon Valley fell -12.19% over the past year while just up the road in Oakland/East Bay, asking rents rose 15%.
Average office vacancy rates nationally stands at 13.2% in 2017 Q1, down ever so slightly from 13.4% in 2016 Q1. Northern Virginia (21.3%) was edged out for the worst office vacancy rate in the US by Dayton Ohio (23.3%) and Fairfield County, CT (23.1%). Here is the Cushman Wakefield report on Northern Virginia’s overbuilt office market. CW_VA_Survey_1Q17 (1)
The lowest vacancy rate in the nation? El Paso, Texas at 6.4%. That is a far cry from Northern Virginia’s 21.3% office vacancy rate.
The bad news? 1) Retail originations fell 23% from Q1 2016. 2) CMBS/Conduit originations were down 17%. 3) Hotel originations were down 40%.
The good news? 1) Healthcare originations were up 22%. 2) Industrial originations were up 40%. 3) Multifamily originations were up 14%.
Notice that Fannie Mae/Freddie Mac multifamily origination programs were up 33% from Q1 2016. At the same time, Life Insurance Companies saw 0% growth in commercial/multifamily originations.
Thanks to The Federal Reserve, short-term interest rates remain suppresed and have for the last ten years.
Office originations grew at a listless 2% from Q1 2016. On-line retailers like Amazon have helped shrinked the retail footprint. But will shared office space and the internet finally drive a spike through office space when employees can work remotely?
Supreme Court Justice Potter Steward said in 1964 in the Jacobellis v. Ohio case, “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [hard-core pornography]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.”
Asset bubbles too are difficult to define, but I know it when I see it.
Take Robert Shiller’s P/E Ratio measure for stocks. There was a Roaring ’20s bubble which burst in 1929 (Black Tuesday), there was the infamous Dot.com bubble. On March 10, 2000, the NASDAQ Composite peaked at 5,132.52, but fell 78% in the following 30 months.
Now we are seemingly in yet another stock market bubble and almost at the P/E Ratio level of the Roaring ’20s bubble (but not near the dizzying heights of the Dot.com bubble … yet).
Stocks do seem awfully “frothy.” But what about home prices? The Case-Shiller 20 composite home price index has grown 43.6% since February 2012. While home prices are not growing as fast as they did during the home price bubble of the last decade, they are going at a rate that is twice as fast as earnings (wage) growth.
These certainly look like asset bubbles. If it looks like a bubble and acts like a bubble, it probablyis a bubble.
Retail REIT and CMBS investors were pleased with the recovery after The Great Recession when retail commercial real estate prices fell then rebounded. But we are seeing a crucial turn in retail real estate values.
The cause? The 2017 surge in retail store closings.
In terms of square footage, it is anticipated that retail store closings will be the largest in modern history.
Smaller retail footprints like RadioShack lead the announced closures.
Digital (online) shopping took its toll.
And stagnant wage growth for the majority of Americans hasn’t helped. The worst after a recession in modern history.
Retail vacancies are now about 10% again after zooming upwards during The Great Recession.
Retail (mall) REIT Kimco has not had a good time since July 2016.
I appeared on Fox News Radio today on the Tom Sullivan Show. He asked me about the non-existant inflation report today, the poor retail sales numbers and the zero percent wage growth report. (One listener sent me an angry email saying all lending trends were positive — he must be a golfer that is confusing declining scores with success).
We also got around to discussing positive bank profits. But I pointed out that bank lending is declining in the face of stagnant wage growth.
Bank Loans and Leases YoY are declining.
As are Commercial and Industrial Loans YoY, the lowest level since July 2011.
1-4 unit mortgages outstanding? We are still below the YoY growth rate at anytime between 1992 and 2008.
Multifamily mortgage debt outstanding is growing and is back at 2007 levels.