commercial real estate values could fall 19 percent if economy improves
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The falling commercial real estate market will certainly be in tandem with a drop in residential real estate values. With millions of families nationwide still underwater on their mortgages, this will only compound the challenges of survival in non-1 percent America.TRANSCRIPT
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Commercial Real Estate Values Could Fall 19 Percent If Economy Improves The news last month that Chicago's Willis Tower is
selling for $1.5 billion suggests that the muscular former
Sears Tower is now a 108-story bubble on the city's
skyline. The sale price sets a new record for commercial
buildings outside New York, but it's just one of the many
new benchmarks that commercial real estate has set
recently. They're fueled in large part by the epochally
low interest rates that have prevailed since the country's
mid-2000s financial crisis.
The easy-money years, during which the Federal
Reserve Board has held down interest rates in order to
stimulate spending, have been fun for some, but
eventually they have to end. For more than six years,
Fed officials have kept the lid on, purportedly hoping to
see spending spark job creation, and better employment in turn spur more spending. But
the results have been lackluster, and in late March, Fed chairwoman Janet Yellen once again
declined to give any specifics on when rates will begin climbing.
Her refusal to nail down a start date was understandable; the economy's long-sought
improvements have not readily materialized. The latest data on employment, which came
out Friday, brought new disappointment. After a year of reasonably good job growth
nationwide, the job market stumbled in March, coming in with the lowest number of new
jobs since December 2013.
Nevertheless, most analysts believe the economy will grow and a climb in interest rates is
inevitable. When it comes, the buying binge on commercial real estate may skid to a halt.
Money has been flowing through commercial real estate like a storm-powered river, pushing
transactions to ever-higher prices both in U.S. cities and abroad. Bloomberg Business
reported recently that U.S. investors are stocking up on European properties at levels that
are approaching the pre-bust 2007 peak. They're doing this in part because the feeding
frenzy in this country has pushed prices up so fast, buyers have to cross the ocean to find
sweet deals.
Of course, the commercial real estate world is a playground for affluent investors, not Main
Streeters, so the party has a distinctly One-Percent result: the big payouts serve to deepen
the nation's wealth divide. Big investors pocket big money on these deals, but it rarely goes
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to job creation or trickles down in other ways; it goes to more and larger investments. As a
result, Wall Street is likely encouraging the Fed to keep rates synthetically low and let the
party roll on.
When the Federal Reserve finally lifts the artificial lid on interest rates, the value of
commercial real estate will drop by 8 percent to 19 percent, Real Capital Analytics forecasts.
The assumption is that today's sub-2 percent 10-year Treasury bond yields would normalize
at a healthier-for-all 4 percent. As the cost of debt increases, property income decreases and
values fall. Other asset classes that are basking in low interest rates will also lose value as
the Fed lifts interest rates in an effort to control the other demon, inflation.
Six years on, we can see that the crutch of low interest rates hasn't done the trick; our
economy hasn't been lifted by easy money. What's been lifted is the value of investment
assets like commercial real estate, benefiting the wealthy more than the country. For
America, interest rates near 1 percent benefit the 1 percent. For most of the 99 percent,
there is no difference if rates are 1 percent or 99 percent. In fact, for some Main Streeters,
interest rates of 99 percent would be relatively charitable, as payday loans have APRs that
often approach 400 percent. Who funds the payday loans and makes the spread between the
1 percent and 400 percent? The rich, of course. It's no wonder that America's wealth gap is
widening to epic proportions.
Unemployment has come down, but most households' incomes have barely improved over
the past several years. Although the price of gas has eased up, leaving some money in our
pockets, healthcare costs are still stratospheric and the fact that most households have little
or no savings means that one more shock to the economy could knock even more people
down to poverty levels.
The falling commercial real estate market will certainly be in tandem with a drop in
residential real estate values. With millions of families nationwide still underwater on their
mortgages, this will only compound the challenges of survival in non-1 percent America.
Recognizing that difficulties are particularly acute for those residing in low- and moderate-
income neighborhoods, American Homeowner Preservation purchases these families'
underwater mortgages at big discounts from banks and offers sustainable solutions to
families so they can keep their homes.
In some respects, AHP is to the 99 percent what the Fed is to the 1 percent: a provider of
propellant. However, AHP fuels the 99 percent's ability to survive while the Fed fuels the 1
percent's ability to thrive.
Low interest rates were supposed to be a short-term crutch, but have instead become the
staple of a years-long feast for the 1 percent. It's time for the Fed to end the festivities,
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remove the crutch and let the partiers take their losses so we can move forward as a nation,
all 100 percent of us.