Pacific Investment Management Co. is pointing to gathering clouds in the roughly $3 trillion commercial real-estate market.
“…[A] confluence of factors—volatility in public markets, tightened regulations, maturing loans and uncertain foreign capital flows—is creating a blast of volatility for U.S. commercial real estate,” said Pimco’s John Murray, in a report jointly written with Anthony Clarke.
That volatility could lead to prices falling by as much as 5% in the coming year for so-called commercial mortgage-backed securities associated with the financing of properties, including shopping malls, apartment complexes and office buildings, according to Pimco’s “U.S. Real Estate: A Storm Is Brewing.
Since the financial crisis, commercial mortgage-bond prices, which got whacked along with a broad swath of complex mortgage-related debt during the 2008 housing-market implosion, have recovered. Pimco attributes improvements in performance to demand for commercial bonds and warns that appetite is likely to peter out in coming months.
“Capital flows have grown unstable over the past year due to fears over interest rate hikes and, more recently, events such as political and economic uncertainty in China,” Murray wrote. “While this instability began in the public CRE markets, it has blown in to private CRE as well, particularly in non-major markets.”
Hundreds of billions of commercial bonds originated 10-years ago are set to mature over the next three years and appetite for higher-yields than CMBS offers is putting pressure on borrowers’ ability to obtain fresh financing and that’s pressuring bond prices.
Contributing to concerns about commercial real estate bonds is a shrinking base of ready buyers that has coincided with increased price volatility, Pimco cautioned.
New rules, which attempt to limit financial firms’ exposures to risky assets in the wake of the 2008 financial crisis, have caused banks to trim their dealer inventories, Pimco explained. A lack of banks serving as so-called market makers has been one of the oft-cited factors associated with a huge swing higher in the prices of Treasurys back on Oct. 15 2014.
But it isn’t all doom and gloom for commercial real estate debt.
Pimco said opportunities may arise from the shakeout, in both real estate and equities, which have shown a close relationship of late. Daily returns of real-estate investment trusts have had a 71% positive correlation to the broader S&P 500SPX, +0.58% since the beginning of 2015, the report showed. In other words, rises in stock prices have tended to coincide with richer returns for REITs.
“For flexible capital, this storm might be a welcome one indeed,” Murray wrote.
Source: http://www.marketwatch.com/story/a-storm-is-brewing-in-the-real-estate-market-pimco-warns-2016-06-20
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