Is there a real estate crash to come? – Daily News

on Aug22
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One of the benefits of a five-decade tenure in an industry is hindsight. Yes, it’s always crystal clear!

Unfortunately, looking into the future is a bit murkier. Every January, we are festooned with economic forecasts from scholars. Doubt what I say? Simply tune in for the Chapman, Cal State Fullerton, UCLA, Charles Schwab reviews and others. All will give their opinion on what the blossoming year will have in store for our economy. Predicted will be growth in commerce, changes in consumer confidence, outlook for interest rates, stock market trends, inflationary pressures and the impact of all of the above on real estate pricing.

But it’s August, and you may be thinking, why look forward to January? Well, when you see Christmas decorations next month, you’ll understand. These next four months will fly by!

I’ve consumed several of these Nostradamus events over the years. One of the most meaningful was in February of 2020. Featured was a panel of experts assembled by Northwest Mutual. One gentleman, in particular, gave a brilliant narrative on the forces that cause a downturn. From my notes: “Mentioned during the preamble was a check of five factors that cause bear markets — inflation, recessions, commodity shortages, crazy market valuations and uncertainty.”

Hmmm, sound familiar? For those scoring at home, we have seen all five since March of 2020. So where or when is the downturn?

In particular, let’s look at inflation. Commercial real estate rents have increased 134% since 2011, a whopping 13.4% per year. If we dissect this further, the last eight months have produced a rise of 12.6%. Annualized, that’s 18.9%!

Investors are ravenously absorbing buildings with crazy high rents at crazy high valuations. Take a look at the pump. We paid $4.89 for a gallon of gas yesterday on the way home from Arizona. Silly me forgot to fill up before we crossed the border! Lumber? The price of a 2-by-4 has gone from $2 to $8. Container loads from China have quadrupled as well.

Again, where is the downturn?

Let’s now talk about uncertainty. One thing that can kill a rally quicker than anything is uncertainty. You see, when businesses or investors are unsure of the future, they postpone buying decisions. This “pause” trickles through our world.

During the financial meltdown of 2008-2011, our real estate market was mired for nearly a year. Prices tumbled. Buyers and tenants enjoyed amazing deals once they saw a clear path of improvement.

We also experienced such a stall in industrial activity between March and June of 2020. But then, something quite unforeseen occurred. Industrial demand went on turbo-charge for the balance of 2020 and the first seven months of 2021. As buying habits morphed from trips to the mall to clicks on the keyboard, commerce adjusted, space was consumed and record profits resulted.

So where is the downturn?

Next, look to commodity shortages. Those raw materials used to make stuff such as copper, lumber, oil and steel. Since we rely upon our neighbors in the Far East for much of this production, and with the noted container load disruption, we are again in short supply. Certainly, this adds upward pressure on pricing. Plus, you just can’t get things. If your fridge goes on the blink, good luck getting a replacement. Roofing for industrial buildings – the steel trusses? You’ll wait at least 13 months!

But where is the downturn?

Hopefully, you’re getting the idea. We’ve survived a “black swan” event – a once every 100 years pandemic and the resulting five factors – inflation, recession, commodity shortages, crazy market valuations, which should have cratered real estate. And the opposite has occurred.

So, where is the downturn? It’s coming, dear readers. It must. Will it be a spike in interest rates, another round of lockdowns, a power surge wiping out the grid, a burst of the pricing bubble, an attack on our soil, a decade of zero interest and growth, something else, or a combination of it all? I only wish my crystal ball wasn’t so murky.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at or 714-564-7104.

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