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

One of the perks of having a fifteen year tenure in an industry is looking back. Yes, it’s always crystal clear!

Unfortunately, the outlook into the future is a little bleak. Every January we are adorned with economic forecasts from scientists. Doubt what i’m saying? Just tune in for reviews from Chapman, Cal State Fullerton, UCLA, Charles Schwab, and others. Everyone will have their say on what the prosperous year has in store for our economy. It forecasts economic growth, changes in consumer confidence, the outlook for interest rates, stock market trends, inflationary pressures and the impact of all these factors on house prices.

But it’s August, and you might be thinking, why are you looking forward to January? When you see Christmas decorations next month you will understand. These next four months will fly by!

I have consumed several of these nostradamus events over the years. One of the most important was in February 2020. A panel of experts put together by Northwest Mutual was presented. One gentleman in particular spoke brilliantly about the forces that cause a downturn. From my notes: “The preamble mentioned a review of five factors causing bear markets – inflation, recessions, commodity scarcity, crazy market valuations and uncertainty.”

Hmm, does that sound familiar to you? For those scoring at home, we’ve seen all five since March 2020. Where or when is the downturn?

Let us look in particular at inflation. Commercial property rents have risen 134% since 2011, a whopping 13.4% per year. If one takes this further apart, the result is an increase of 12.6% in the last eight months. This is an annualized rate of 18.9%!

Investors greedily swallow buildings with insanely high rents at insanely high valuations. Look at the pump. We paid $ 4.89 for a gallon of gas on our way home from Arizona yesterday. Stupid, I forgot to fill up before we crossed the border! Wood? The price of a 2-by-4 went from $ 2 to $ 8. Container loads from China have also quadrupled.

Again, where is the downturn?

Now let’s talk about uncertainty. One thing that can kill a rally faster than anything is uncertainty. You see, when companies or investors are unsure of the future, they postpone buying decisions. This “pause” seeps through our world.

During the 2008-2011 financial crisis, our real estate market was stuck for almost a year. Prices tumbled. Buyers and tenants benefited from great offers as soon as they saw a clear improvement path.

We too experienced such a standstill in the industry between March and June 2020. But then something very unexpected happened. Industrial demand increased for the remainder of 2020 and the first seven months of 2021. As buying habits shifted from shopping sprees to keyboard clicks, retailers adapted, took up space and made record profits.

So where is the downturn?

Next, consider the scarcity of raw materials. These raw materials from which materials like copper, lumber, oil and steel are made. Since we are dependent on our neighbors in the Far East for a large part of this production and with the container load disruption that has been identified, we are again in short supply. This certainly increases the price pressure. Besides, you just can’t get things. If your refrigerator suddenly breaks, good luck with getting a replacement. Roofing for industrial buildings – the steel girders? You will wait at least 13 months!

But where is the downturn?

Hopefully you get the idea. We survived a Black Swan event – a 100-year pandemic and the resulting five factors – inflation, recession, raw material shortages, crazy market valuations that should have cratered real estate. And the opposite has happened.

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 price bubble, an attack on our soil, a decade of no interest and growth, something else, or a combination? it all? I just wish my crystal ball wasn’t that cloudy.

Allen C. Buchanan, SIOR, is a Principal at Lee & Associates Commercial Real Estate Services, Orange. He can be reached at [email protected] or 714-564-7104.