Wednesday, July 22, 2015

Commercial real estate still booming

The commercial real estate market is doing very well, with prices of existing properties rising at strong double digit rates and a pickup in Architecture Billings pointing to stronger growth in commercial construction spending over the next year.

According to the CoStar Group activity in the commercial real estate market is very strong. Prices are rising at a 12-14% pace. Space absorption was the strongest in the current recovery. Leasing activity is robust. Investment activity is surging. This is a very strong indicator that the U.S. economy is doing just fine, and that growth could be picking up.

Architecture Billings are a good leading indicator of commercial construction activity, and the June reading was the strongest in the current recovery. See more details at Calculated Risk.

Very impressive.


Benjamin Cole said...

One of the oddities of the commercial real estate market is that now a buyer of a commercial property will find it easy to obtain financing, perhaps even aggressive financung. But now prices are near records.
At the depths, back in 2008 a buyer would have had difficulty obtaining financing to purchase a property.

Banks are often heavy lenders exactly at the peak---in fact help create the peak.
This cycle has played out so many times one might think there is some sort of market correction. That there would be some group of lenders eager to lend after a bust. Never seems to work out.

steve said...

scott, a bit off subject but while certain areas of the economy look quite healthy, obviously commodities are tanking-across the board. that cannot portend well for a 2% growth economy. so which is right, commodities or commercial re et al and what should the fed be most focused on as re raising rates?

Scott Grannis said...

My favorite commodity index is the CRB Raw Industrials. It has fallen about 30% from its peak in 2011, but it is still more than double its low of 2001. It is normal for commodity prices to rise and to fall during recoveries. I note that this index fell almost 30% from 1984 to 1986, even as the economy boomed. Commodities are driven by supply and by demand. When prices rise a lot because demand has jumped, that stimulates new exploration and production which in turn eventually increases supply which then puts downward pressure on prices.

Falling commodity prices can be a good thing, if they are the result of increased supplies. I think that's the case today, but I have to tone down my optimism because it is true that the Chinese economy and other developing economies have weakened on the margin.

So commodities can be demand- and/or supply-driven, and the complex interaction of the two can be hard to sort out. It would be tough for the Fed to try to manage commodity prices.

But gold is mostly demand-driven, since the outstanding supply of gold is monumentally huge (all the gold ever produced is still in existence, which is very different from other commodities, which are mostly consumed every year), but new supplies are only about 3% of the outstanding stock. So the Fed could in theory manage the price of gold by influencing demand for gold relative to demand for bonds.

William said...

Scott - Thanks for your discussion of commodity pricing.

There is another major investment category which is not behaving as though the global economy is improving. That is global government bonds.

In January when the fear of disinflation was very high, US 10 year treasuries traded as low as 1.66% yield, the German 10 year bund as low as 0.05% and the Japanese 10 year at 0.20%. After the ECB initiated QE, global investors took a deep breath and decided that deflation was not such a threat and the bonds above mentioned rose to 2.5%, 1% and 0.5% respectively by June. Over the past 6 weeks the yields have fallen again to yield 2.27%, 0.7% and 0.42% today.

Generally, when investors perceive that the global economy is picking up speed, the prices of commodities rise and the prices of bonds fall - meaning that bond yields rise. The past 6 weeks has seen an acceleration in the fall of commodities and of sovereign bond yields.

Meanwhile global equity prices have stalled at rather high levels.

William said...

@ Benjamin -

There are other activities which occur around market cycle peaks which are also occurring: high levels of IPOs in technology companies, mergers, secondary stock offerings, Private Equity firms selling their previously privatized investments or making additional stock offers of recent IPOs, insider stock sales, etc.

All of these sales are being made by "insiders" who know very well what their companies are worth and understand when they are receiving a very good price for the assets. There is a relatively small window of time during each market cycle when these large shareholders can sell a huge amount of stock at a very good price or indeed a very high price.

These activities are actually a good way to judge when a market is fully valued. There are no bargains in this market. And various formulae suggest that the future 5 year return on equities from present prices will be negative. Or put another way, over the next five years there will be opportunities to buy equities at much lower prices.

Unknown said...

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Harry @ Bonifacio Global City

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