The Real Deal New York

CRE surge sparks bubble fears

Prices and activity soar around world, according to new Real Capital data

August 13, 2015 09:44AM

Office properties in Manhattan

Prices are soaring on commercial real estate worldwide, with New York, Los Angeles, Berlin and Sydney all hitting post-2009 records, sparking fears the global market may be overheated.

The number of commercial real estate transactions in the U.S. rose 36 percent year-over-year, to $225 billion, the highest rate since 2006, according to Real Capital Analytics data cited by the Wall Street Journal.

As central banks continue to add liquidity to economies around the world, keeping interest rates low, financial assets like government and corporate bonds have seen relatively meager returns. In response, investors have shifted their spending to commercial real estate.

“We’re calling it a late-cycle market now,” Jacques Gordon, head of research and strategy at Chicago-based LaSalle Investment Management, told the Journal, adding that while it’s not time to panic, “if too much capital comes into any asset class, generally not-so-good things tend to follow.”

U.S. pension and foreign investors have led the charge, with Chinese investors at the forefront.

“If too much capital comes into any asset class, generally not-so-good things tend to follow.”-LaSalle Investment Management’s Jacques Gordon

New York has seen more than its fair share of transactions. Back in February, the Blackstone Group bought a 50 percent stake in six New York-area office buildings from RXR Realty. China’s Anbang Insurance Group paid nearly $2 billion in March for the Waldorf Astoria Hotel. And in February, Canadian pension fund Ivanhoe Cambridge paid $2.2 billion for 3 Bryant Park.

The market for commercial mortgage-backed securities, the collapse of which played a key role in the 2008 financial crisis, has also surged back, with activity in New York hitting $11.54 billion in the first half of 2015.

The Federal Reserve has been hinting it will raise interest rates this year, which is expected to raise bond yields and dampen some of the enthusiasm for commercial property. [WSJ] – Ariel Stulberg