Brick-and-Mortar Meltdown Sinks Property Prices

Wolf Richter's picture

By Wolf Richter, WOLFSTREET.com:

Commercial real estate prices soared relentlessly for years after the Financial Crisis, to such a degree that the Fed has been publicly fretting about them. Why? Because US financial institutions hold nearly $4 trillion of commercial real estate loans. But the boom in most CRE sectors is over.

The Green Street Property Price Index – which measures values across five major property sectors – had soared 107% from May 2009 to the plateau that began late last year, and 27% from the peak of the totally crazy prior bubble that ended with such spectacular fireworks. But it has now turned around, dragged down by a plunge in prices for retail space.

The CPPI by Green Street Advisors dropped 1.1% in October from September. In terms of points, the 1.4-point decline was the largest monthly decline since March 2009. The index is now below where it had been in June 2016:

This phenomenal bubble, as depicted by the chart above, has even worried the Fed because US financial institutions hold nearly $4 trillion of CRE loans, according to Boston Fed governor Eric Rosengren earlier this year. Of them, $1.2 trillion are held by smaller banks (less than $50 billion in assets). These smaller banks tends to have a loan book that is heavily concentrated on CRE loans, and these banks are less able to withstand shocks to collateral values.

Rosengren found that among the root causes of the Financial Crisis “was a significant decline in collateral values of residential and commercial real estate.”

But the CRE bubble isn’t unraveling as gently as the chart suggests. Some sectors are still surging, while others are plunging. According to the report, the index, which captures the prices at which CRE transactions are currently being negotiated and contracted, “was pushed down by falling mall valuations.”

Which sector is plunging, and which is soaring?

Brick-and-mortar retail space is getting crushed. The index for strip retail fell 5% year-over-year. And the index for mall prices plunged 6% in just the month of October from September – a huge move in one month – and are down 11% from a year ago.

The self-storage sector, formerly the hottest sector of them all, having surged 180% since the trough of the Financial Crisis, has turned cold, and prices are down 3% year-over year.

Lodging took a 12% plunge that started in 2015, and it never recovered. It has remained essentially flat since, currently with a 1% gain over the beaten-down levels last year. Lodging has been under attack from a structural shift to home-sharing rentals, such as Airbnb, and even at its peak in 2015, the index barely hit its peak before the Financial Crisis, before dropping again. It is now down about 10% from its 2007 peak.

The industrial sector is hot. The index jumped 10% year-over-year in October. Industrial includes warehouse space for “fulfillment centers,” as Amazon calls them. They are in hot demand, not only from Amazon, which has been leasing them around the country, but also from other logistics and retail companies involved in the online retail boom.

The apartment sector is still hanging on by its fingernails, with prices up a measly 1% from a year ago, but down from their peak.

The office sector index rose 3% year-over-year. While price growth has slowed, there has been no significant decline in recent months.

Healthcare is still rising, up 4% year-over-year, as the industry takes up an ever larger slice of the US economy.

The CPPI is based on estimates of private-market value for REIT portfolios across the five major property sectors with an aggregate asset value of $600 billion, according to Green Street Advisors. Since REITs own high-quality properties, the index measures the value of institutional-quality commercial real estate.

Investors tend to jump on the next hot trend, and years ago, they jumped on retail malls in the hope that the American consumer couldn’t ever be crushed. That is likely true. But that consumer has changed buying habits, and malls are being left out. Maybe these folks should have bought gold coins instead. At least they’d have something that doesn’t have to be razed, which is the fate many malls are facing.

CRE is clearly showing the side effects of the structural switch to online retailing. For retailers with a large brick-and-mortar presence that are trying to restructure their operations and finances to survive in this era, or for their landlords such as REITs, this structural change will drag out for years and will be painful. But for some, this (creative) destruction in the brick-and-mortar meltdown is already painful. Read…  Malls and their Hapless Investors Keep Getting Crushed

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PotusNextus's picture

Rosengren found that among the root causes of the Financial Crisis “was a significant decline in collateral values of residential and commercial real estate.”

What a moronic understatement by Rosengren! The U.S. lost %40 of its collateral value bubble pumped up by Wall street trying to monopolize the local to Wall Street verticAL STRUCTURE of real estate markets until that point.

Real Estate in U.S. was/is the single largest financial market in the WORLD. And the %40 (generously) has never been paid off since, due to the Fed playing a shell game with the loss and transposing it to the inflated stock market. [leverage at bubble prices corrected to %60 of the collateral value no one could pay back the loans with their credit reduced].

When will this bullshit END?

Mondo denial global denial of financial market ruins is still leading us into (already in) major deflation 'cycle' which can only be the ugliest thing experienced in the western world since exterminating the indigenous Indian populations when it was discovered.

StreetObserver's picture

A mini lesson for patriots:

There are few 30 year commercial loans.

New credit has to be otained, usually every five years, to pay off and roll over the last loan. If interest rates go up, it's doomsville, especially when no bank will lend you the new money to pay yesterday's interest based on ever lower brick and morter rents. 

Smart people got 30 year mortgages at low fixed rates. Those who got Adjustable Rate Mortgages were like shopping center owners and got screwed, but the banks were made whole by we sucker taxpayers.

buzzsaw99's picture

Of them, $1.2 trillion are held by smaller banks (less than $50 billion in assets). These smaller banks tends to have a loan book that is heavily concentrated on CRE loans, and these banks are less able to withstand shocks to collateral values...

 

the fed LIKES IT when smaller banks go under that way they can be bear-stearnsed making the big banks bigger and giving them license to steal sweet deals from the fed and fedgub under the guise of doing us all a favor.  in the same way raising the overnight helps the big boys destroy the smaller banks by putting their ballz in a vise.

 

as far as the other $2.8T held by the big boys, well any real stinkers can be maiden laned to the fed or fed gub.  the fed isn't worried, they have it all under control.  it is us who  should be careful because those maggots want to fuck us at every turn with lies, misdirection, manipulation, and outright fraud.

StreetObserver's picture

Yeah but smaller banks have little or no exposure to derivatives that add up to Trillions of dollars.

Thanks to Dodd Frank, those dereivatives are in line ahead of depositors for the already scant FDIC insurance.

When the derivates blow up, Wells Fargo, Bank of America, Citibank customers will lose every cent of their deposits.

Smaller banks and credit unions will at least have some FDIC insurance.

Consuelo's picture

 

 

"The industrial sector is hot. The index jumped 10% year-over-year in October. Industrial includes warehouse space for “fulfillment centers,” as Amazon calls them."

 

Whether one travels to a mall or does their shopping online, the key driver will always be:

Disposable $Income.

You either have it, or you don't.

To have it, means gainful employment with paycheck proceeds to spare.

Or,

A continuously rolling-upward balance on one's credit card/s.

 

And this is what positive economic projections into the future are based upon...?

Ben A Drill's picture

I propose a sales tax holiday on every Federal Holiday.

Conax's picture

'Because US financial institutions hold nearly $4 trillion of commercial real estate loans.'

Those were some risky loans to be making, bankers.  The US (at least my area) has hundreds of acres of stores and restaurants that seemed to spring up around every highway exit anywhere near a town. We are over-retailed up the wazoo. Maybe the banks should have had "Just Say No" signs in their offices.

EZ online shopping was coming, they just couldn't or didn't want to see it. The savings in time, aggravation and gas, the threat of being nignogged on your way in or out, the constant bad weather, hell, might as well point and click.

Son of Loki's picture

Healthcare is getting slammed by a number of factors including Obamacare. The largest cancer hospital center in the world is bleeding money trying to keep up with gubmint paperwork and electronic med records.

 

MD Anderson starts 2017 fiscal year with massive losses

 

http://www.houstonchronicle.com/news/houston-texas/houston/article/As-MD...

 

xxxxxxxxxxxxxxxxxxxxxxxxxx

 

MD Anderson cutting staff by 1,000 workers via layoff, retirement

 

http://www.chron.com/news/houston-texas/article/MD-Anderson-set-to-annou...

 

"I fundamentally changed America!"

 

~ Soweto Hussein bin Bama

fx's picture

LOL, a 1-2 % drop - and that justifies a headline claiming "xyz SINKS prices"? Sure.

ROFL

Aireannpure's picture

Not good for entitlements that thrive on these tax revenues. The rent is too damn high.

PotusNextus's picture

connect the dots...the 'entitlements' receivers pass SSI etc to LANDLORDS and SuperMarkets who are the actual beneficiaries of so called entitlements. nothing left after that. MedicAID IS LIKELY CLOSE TO THE profit spread of the medical pharmaceutical industry. The so called entitled are there to blame but constitute nothing more than a put through to the actual beneficiaries the money goes to..