Why I Don’t Fear the Bubble

bubblefears.jpg

It was July 2015 when the Fed foolishly warned that commercial real estate was in a bubble, earning itself quite a reputation for stoking bubble fears. Prior bubble fears of bubbles in the S&P 500, biotech, and social media haven’t been too… well, good, as we’ve noted many times. The Fed believed, “valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly,” as reported by The Wall Street Journal.

But as I said here, we’re far from frothy bubble-like conditions in commercial real estate. With a great deal of capital inflow likely from domestic and foreign investors, which we’ve long talked about, I don’t believe we need to concern ourselves with Fed fears of another bubble.

Unfortunately, those with short attention spans don’t get it.

The Wall Street Journal now fears the bubble.

“Investors are pushing commercial real-estate prices to record levels in cities around the world, fueling concerns that the global property market is overheating,” they note. “Deal activity is soaring as well. The value of U.S. commercial real-estate transactions in the first half of 2015 jumped 36% from a year earlier to $225.1 billion, ahead of the pace set in 2006, according to Real Capital.”

“The surging demand for commercial property has drawn comparisons to the delirious boom of the mid-2000s, which ended in busts that sunk developers from Florida to Ireland. The recovery, which started in 2010, has gained considerable strength in the past year, with growth accelerating at a potentially worrisome rate, analysts said.”

They also fear that property values could fall if interest rates were to rise sharply. That’s not likely to happen, though. Fears that surging rates could send shockwaves through the commercial real estate space have become a bit absurd.

To start, no one expects the Fed to do anything severe with current rates. After holding short-term rates near zero percent for so many years, we’re likely to see a 0.25% move in September and possibly a hike of similar size by early 2016… nothing crazy.

It’s why I’m not very concerned about the Fed whatsoever.

With the capital flowing into the U.S., I don’t see a bubble bursting any time soon.

There’s an idea, for example, that New York real estate is in a bubble soon to burst. It’s not true, though.

As discussed by NYReg:

“There is a perception that the rising prices in New York City real estate are indicative of a bubble - and bubbles, as we know, will inevitably burst. Investors, according to the many skeptics, have inflated the market beyond its real value, which will ultimately lead to a crash. Nothing could be further from the truth.

New York City investment is not speculative; it is based on market fundamentals. The city has a limited supply of affordable and mid-tier housing as well as undeveloped land, so despite a recent uptick in construction activity, there is every indication that the dearth of supply will continue.

It's not just the residential market, as there is significant demand for office space, as well. New York continues to be attractive to media companies as well as international firms seeking a presence in the United States, and the city's tech sector is robust and growing. Despite the construction of several major office properties, notably in Hudson Yards, the city still has a shortage of up-to-date quality office space.

What's the true indicator that New York City real estate is truly for real? It's not just our neighbors driving demand. Foreign capital has been flowing into the Big Apple because savvy international investors recognize that, compared with other major domestic and foreign real estate markets, New York provides both favorable yields and incredible stability.

Even if prices do decline, the limited supply will ensure that they do not fall very far. New York's upside is that it will continue to be one of - if not the - most popular cities, which contributes to making it one of the healthiest real estate markets in the world. The downside is that it will provide investors with yields more on par with other leading international cities, but greater stability.”