2020 The Year The US Commercial Real Estate Bubble Burst







Years of economic growth and easy financing have pushed prices for office towers, apartments and warehouses to record heights. This bubble has already burst. Just look around at retail spaces,everything is either closing or is empty of commerce and trying not to close! The prices are un-affordable. Some people still think real estate is a panacea where nobody can lose money.I can say from personal experience that if you are unlucky or make the wrong moves it can be a black hole. Welcome to The Atlantis Report . In order to understand the bubble that is currently forming in U.S. commercial real estate, it is important to first understand the extremely unusual monetary environment that the U.S. has been in since the Great Recession. After the U.S. housing and credit bubble burst in 2008, the Federal Reserve was desperate to stimulate the economy by slashing borrowing costs. The Fed cut and held interest rates at virtually zero percent (i.e., zero interest rate policy or Zero Interest Rates Policy , for seven years and has been gradually increasing those rates since late-2015. Unfortunately, dangerous economic bubbles form during low interest rate periods and burst when rates rise once again. The dot-com and housing bubbles formed in this manner and so are numerous other bubbles in the current cycle, including commercial real estate. Commercial real estate is particularly sensitive to interest rates, and benefits when rates are low and suffers when rates are high. 20 years of cheap borrowed money have been an incentive to build and chew up perfectly good land with cheap construction so that other people could borrow money to pay rent. Ponzi all the way round. Commercial property prices are at record highs ,But that’s not all. Normally, banks would tap the brakes on lending, and the market would cool. But since the 2008 financial crisis—when banks became more disciplined—other lenders have muscled in and are keeping the financing flowing. They include debt funds with multibillion-dollar warchests that aren’t subject to the same level of oversight. Some are competing with aggressively low rates and terms. Now even some banks, under pressure to compete, have loosened standards in recent quarters . The availability of cheap debt helps investors stretch on price. Observers can see it in capitalization rates. Put basically, cap rates are a property’s investment yield—making them the favored metric for gauging real estate prices. It’s a simple calculation: Divide net operating income (rent minus expenses) by a building’s value. They’ve been going down significantly for most property types. At these levels, buyers of commercial real estate today are, in effect, settling for thin returns or betting they can improve yields over time by persuading tenants to pay more. Real estate prices appreciation attracts so many people who have a very limited understanding of the risks associated with real estate development. You probably have to survive several real estate market cycles to really get it under your skin that you can get burned and lose everything with little chance to recover your losses when market turns against you. We have landlords raising prices on small business and restaurants even if their properties are half empty. Most move, and they landlord raises the rent on the few remaining until the whole building is empty. If this was a business based on cash flow, it wouldn't be happening. It's a game of musical chairs and the music is about to stop. What asset class other than metals is not in a bubble . We are in a game of musical chairs. conservatively one chair per two hundred players. When the music stops the fun will really start. Yield chasing real estate plays led to rate compression. Good for sellers, bad for investors because supply was increased. This was an avoidable slow motion car crash but stupidity out performs until it doesn't. There will be no 9-1-1 when the crash comes. Lots of unnecessary casualties. I think this impending crash is like the Vietnam War being ran by inbred, banjo playing bankers.









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