What is the next big threat to CRE?

Question

Just thought it would be good to brainstorm on this. CRE is at a high and regardless of fed hikes, it doesn't seem like cap rates are increasing. Investors are willing to take smaller spreads. At what point will the market turn? Is there a black swan coming?

InVinoVeritas · Accepted Answer

IMO, the threat to real estate is threefold.

Drastically increasing construction labor and materials costs. This is further impacted by the Trump administration's immigration/trade policies.
Irresponsible lending, particularly in the debt fund space. Deals are only making due to super cheap floating rate interest-only high leverage debt. Interest rates go up, cap-rates follow, supply shock of properties on the market to cover balloon payments, etc...
Unrealistic rent growth assumptions due to low real wage growth and rising student debt in America.

REPESailor2020 · Answer

"TeddyTheBear"
Just thought it would be good to brainstorm on this. CRE is at a high and regardless of fed hikes, it doesn't seem like cap rates are increasing. Investors are willing to take smaller spreads. At what point will the market turn? Is there a black swan coming?

It seems when things are going good, it is hard to imagine them going bad. I have been looking closely at the Minneapolis multifamily market. Development has been ongoing in a big way for the last 3 years, the market continues to absorb it with 3% rent growth.

REAcquisitionsnyc · Answer

RE: near-term risks: cap rate expansion.

Most prudent investors have been underwriting cap rate expansion of 50-75 bps above spot cap rates for purposes of formulating an exit valuation. The current 10-year treasury - cap rate spread across property types is still fairly wide despite recent 10-year increases, so there is room for treasury rate hikes to be absorbed without causing an increase in cap rates.

REAcquisitionsnyc · Answer

It will be interesting to see how parking components of properties are retrofitted, if at all, as spaces become obsolete. There is no question that last-mile distribution and other forms of industrial will take a hit.

Not sure the direct impact on core multifamily, office and retail. I live in a major city because I like the fact that I can walk to work and have all amenities that I need at my doorstep. Even if I were able to live in a suburban setting at a third of the cost, I am not sure that I would do so. This feeling might not be shared by others.

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What is the next big threat to CRE?

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