A bubble in commercial real estate may be about to pop

Posted on April 19, 2018

  • Banks are ramping up the extension of commercial real estate loans
  • CRE prices peaked in 2016, and are now flat-lining, which is partially due to the downturn of malls and traditional retail.
  • Office and lodging buildings have been hit hard too.

Commercial real estate loans at banks in the US reached a record of $4.3 trillion. This amount is now 11% higher than it had been during the crazy peak of the prior commercial real estate bubble before it imploded during the Financial Crisis. In CRE, leverage is everything. Banks, particularly smaller regional banks that specialize in it, are on the hook.

Fed governors have pointed at CRE as one of the places where “elevated” prices threaten “financial stability” because of leverage and the connection to banks. CRE loans were in part responsible for the near-collapse of the financial system during the Financial Crisis, after CRE prices – the value of the collateral for those loans – turned down.

And now, these bubble prices have started to turn down once again.

Commercial real estate prices collapsed nearly 40% during the Financial Crisis, according to the Green Street Commercial Property Price Index (CPPI). Then prices more than doubled from the low in May 2009 and peaked in September 2017, when the index was 27% above the crazy peak of the prior bubble.

But since September 2017, the index has dropped 1.7%, including a 1% drop in March from February. It is now down 2.1% from March last year and back where it had been in May 2016.

This chart of the CPPI shows the phenomenal eight-year boom that has turned into a decline:

Screen Shot 2018 04 16 at 2.55.51 PMGreen Street CPPI

The chart below shows the percentage changes of the CPPI compared to the same month a year earlier going back to the Financial Crisis. Note the trend since 2015 of diminishing year-over-year price gains that turned into actual price declines late last year (red columns) and took a bigger dip in March:

Screen Shot 2018 04 16 at 2.56.50 PM
Green Street CPPI


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