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Will U.S. Commercial Real Estate Prices Continue to Slide?

Headlines have captured what's been going on with U.S. commercial real estate prices:

  • Banks may have to brace for heavy losses as commercial property prices plunge (October, CNBC)
  • Distress looms over U.S. commercial real estate in 2021 (December, Marketwatch)
  • Commercial Real Estate's Pandemic Pain Is Only Just Beginning (December, Bloomberg)

The February 2021 Elliott Wave Financial Forecast, a monthly publication which provides subscribers with analysis of major U.S. financial markets, provides its perspective on the U.S. commercial real estate market:

PropertyPrices

A diverging trend in property market prices highlights the bearish potential. Residential prices are reputedly "booming," as the median price of U.S. houses sold rose to a record $346,800 at the end of last year. The fourth quarter record was up 6% from a year earlier but just 2.6% from the fourth quarter of 2017. By another measure, the average sales price of houses sold in the U.S. has essentially matched the 2017 peak, as the bottom graph on the chart shows. Meanwhile, commercial property is in a full-scale retreat. The top graph shows that the commercial market turned down in January 2020. The trend reversal had been building for some time, as EWFF observed weakness in various bellwether markets beginning back in 2017. With their population shrinking, many cities now face unprecedented challenges. New York City is the prime example. The office vacancy rate hit 14.9% in January, the highest level in data going back to 2000, according to Colliers International. New leases fell by nearly 47% from the same period a year ago, even as asking rents slipped to the lowest level in almost three years. There have been seven straight months of decline.

The knock-off effects for the city are just starting to register. On January 15, NYC's Department of Finance revealed that property sales will be down 5.2% in the current fiscal year. The decline is the largest since the early 1990s. As a result, property tax revenue will be down an estimated $2.5 billion. Even in the best of times, the infrastructure and decorum of the city is bound by tenuous threads. Both the March and April 2016 issues of The Elliott Wave Theorist offered a detailed history of Manhattan real estate's intimate connection to the Grand Supercycle bull market. More recent issues described the subtle evidence of a peak and emerging negative mood trend. In September 2019, for instance, when builders of the world's new tallest residential building, Central Park Tower, topped off the structure, EWFF stated, "The celebration is a perfect starting point for a new era of over-capacity and deflation." That over-capacity is now plain to see. The super skinny, supertall residential towers will be the last great additions to New York City's famous skyline. They form a border around the south side of Central Park in a line now known as Billionaires Row. Here's the latest update from yesterday's edition of The New York Times: "The Downside of Life in a Supertall Tower: Leaks, Creaks, Breaks." An emerging bear market will bring conditions that make the 1970s feel like a house party. As in the '70s, the chaos will not be confined to the city.