2016 might later be called the peak year in terms of commercial
real estate, or even the post-peak year, depending on the metric.
Overall office sales in 2016 fell 7% from 2015, to $140.5
billion, according to JLL research cited by CommercialCafé, a sister
company Yardi Matrix. And leasing activity was hampered by office
tenants that were “reluctant to make any major moves pending the
conclusion of the presidential election.”
But graciously, foreign investors jumped in with both feet to
help out. The report by CommercialCafé:
[T]he market has become a haven for offshore investors, who are
pumping record amounts of capital into US office assets,
especially in primary urban cores. According to JLL research,
foreign office investment surpassed $20 billion in 2016,
accounting for 16% of the overall acquisition volume.
And while, historically, Canadians have been the most active
foreign players on the market, Asian and German investors are
now stealing the spotlight.
Of the 50 largest office deals that closed in the US in 2016
– the trophies that get global attention – offshore buyers
accounted for 43%! And those from Asia alone accounted for 16%:
- Mixed foreign and US: 9 deals for $7.1 billion, 19% of total
- Asian: 8 deals for $6.0 billion, 16% of total
- European: 5 deals for $2.3 billion, 6% of total
- Canadian: 1 deal for $914 million, 2% of total
Notable purchases by foreign entities included China Life’s $1.64
billion purchase of 1285 Avenue of the Americas in New York, in a
joint venture with RXR Realty (New York); and Hong Kong Monetary
Authority’s $1.15 billion acquisition of 1095 Avenue of the
So how is their market timing?
The Greenstreet Property Price Index in
February was flat for the fourth month in a row. You have to go
back to the early 2000s to find a flat spot this long. During the
Financial Crisis it peaked, and without dilly-dallying around, it
plunged, and then, fired up with the Fed’s free money, it soared.
But this time, there is no crisis. It just hit the ceiling.
Year-over-year in February, the index rose only 2%, not even
keeping up with consumer price inflation, a bitter disappointment
after nearly eight years of a blistering boom during which the
index soared 107%:
As the chart shows, CRE is highly cyclical. Even the Fed, which
rarely worries about asset bubbles and has a passion for
inflating them, is officially worried about the CRE bubble and
what its implosion might do to the lenders. Its efforts to make
monetary policy less accommodative are in part targeting the CRE
price bubble. So it is unlikely that the plateau of the past four
months will just remain a plateau.
The biggest culprit was the apartment segment. The sub-index fell
3% in February and is down 4% from a year ago. The office sector
still rose 2% for the month and 5% year-over-year. Self-storage
which had been white hot, having surged nearly 160% since the
trough in 2009, declined in February for the first time since
that trough, but was still up 8% year-over-year.
The remaining segments – industrial, mall, strip retail, health
care, and lodging – were essentially flat year-over year, except
malls where the index still eked out a gain of 3%, despite the
store-closing and bankruptcy
turmoil taking over the brick-and-mortar retail industry.
Commercial real estate loans have not yet seen any such plateau,
and leverage has continued to soar, even as valuations have hit
the ceiling, and even as transaction volume declined last year.
In February, commercial real estate loans at all US commercial
banks increased once again, to hit a new all-time record of $1.99
So thank you, foreign buyers, for stepping in at these red-hot
prices when we need help the most. But foreign buyers were
obviously not the only ones still buying.
The largest office building transaction was the $1.93 billion
purchase of the AXA Equitable Center at 787 Seventh Avenue in
Manhattan, by CalPERS in California, the largest public pension
fund in the US. The deal was one of CalPERS’ largest ever
investments. It closed in January 2016, before the dark clouds
had started to waft over CRE. AXA Financial was the seller.
CalPERS is counting on 7% annual returns every year, for all
years to come, and even then it is woefully underfunded. So it’s
going out on a thin limb to get those returns, and a glitzy
office complex, acquired at peak dollars after seven years of
booming prices, is one of its efforts in that direction.
And borrowing money to fund these transactions is going to
get more expensive, which makes the equation tougher to solve for
potential buyers. This is an issue for commercial as well as for
residential real estate. “Many fear the Fed is behind the curve.
The market is even further behind: This is clearly a dangerous