We attended an impromptu real estate salon last week, meeting a couple of long-time sources for a late lunch at the Bryant Park Grill. Although the commercial real estate market is having a decent year, we talked a lot about where we could be this time next year – and about the possibility that all of the new multifamily supply that’s coming on line could turn into oversupply if the economy falters.
Of particular concern to our sources were cities like Denver that have put up a lot of product around transit hubs. But other up-and-coming cities that have added substantially to their multifamily stock could also find themselves in difficulties. A major concern – and one that could present potential for a savvy investor – is New York’s high-end apartment market, where supply is super-ahead of demand.
The single-family residential market is also causing worry, with one of our sources commenting that he’s been seeing the kind of ads that terrified him in 2007: residential mortgages with no money down for individuals with scanty or sketchy credit histories.
All of this made us ask if the commercial real estate market is at the top of the current cycle. While there haven’t been any transactions similar to Blackstone Group’s 2006 acquisition of Equity Office Properties, which marked the top of the last market, Amazon’s planned acquisition of Whole Foods could be seen as a similar high. Obviously, it’s not a real estate deal but Amazon will be paying about $750 per square foot for each Whole Foods Store, according to published reports. Like our lunch buddies said, that’s a big number.
There was a consensus that the current cycle could end sooner than expected, particularly if the stock market weakens. There could be a lot of pain in the transit-oriented multifamily markets as well as urban office markets like New York and San Francisco, where a lot of big projects are going up. And there’s a lot of money that’s been waiting on the sidelines that could swoop in when the going finally gets tougher.