While commercial markets around the world show signs of stabilizing, evidence is mounting that the worst is still ahead for the United States.
Commercial property values in the U.S. are already down more than 40 percent since 2009, according to Moody’s Investor Services. And Goldman Sachs predicts commercial prices could fall another 17 percent through the fourth quarter of next year.
Bubbling beneath the surface, billions of dollars in commercial mortgages are leveraged to securities, much in the same disastrous fashion as residential loans. In a recent article titled “Commercial Real Estate’s $1 Trillion Time Bomb,” Wall Street Journal writer Lingling Wei suggests defaults in commercial property could send a devastating $1 trillion ripple through the U.S. economy.
“In contrast to home loans--the majority of which were made by only 10 or so giant institutions--thousands of small and regional banks loaded up on commercial property debt,” Wei wrote. “As a result, commercial real estate troubles would be even more widespread among the financial system than the housing woes.” (The article can be found here, but may only be available to subscribers.)
In recent testimony before a Congressional committee, Christina Romer, chairwoman of the White House Council of Economic Advisers, downplayed the doomsday scenarios. "This is a slower, evolving problem, so it is one that we will have the time and ability to deal with," she told the Joint Economic Committee.
But the pessimism toward the U.S. commercial market fits with the findings of the latest survey by the Royal Institute of Chartered Surveyors. In a “noticeably more upbeat” report on global conditions, the one glaring exception was the United States, where 53 percent of members said they expect more declines in the market this year.
The negativity in the U.S. was a sharp contrast to the outlook for the rest of the world. In almost every other country RICS members reported the outlook for tenant demand of commercial property is “either less negative or more positive” than past surveys.
“Less negative” may not exactly inspires waves of celebration, but it’s better than the “hell on earth” prognostications of past quarters.
In Hong Kong, for example, 67 percent of respondents expected rents to fall last quarter; this quarter 16 percent said they actually expect rents to increase, the RICS reports. But the turnaround in sentiment was not as pronounced in other parts of the world. While such emerging European markets as the Czech Republic and Turkey reported upswings, “old” Europe centers like Ireland, Spain and France have the “worst readings on the global rental outlook.”
Latin America and Asia showed the biggest growth, while the U.K. and the United Arab Emirates fell into the “less negative” category. Surveyors also reported increases in investor activity, with values expected to increase in markets like Poland, the U.K. and Brazil.
“The rebound in Asian economies is clearly being reflected in the more positive responses to both rental and capital value expectations throughout the region,” RICS chief economist Simon Rubinsohn wrote in a press release. “By way of contrast, the relatively sluggish economic revival though much of Europe and the U.S. is consistent with the more downbeat results for these regions.”
The full report can be found here. (And you can find links to other recent reports on global commercial and residential markets in the IPJ Research section.)
