Economy Watch: Pimco Predicts Stormy Times Ahead for CRE

The company's recent report points to several factors that could lead commercial real estate prices to fall as much as 5 percent in the next year.

CRE’s had a good run for some years, but now it’s time for predictions of worse times to come. According to Pacific Investment Management Co., commercial real estate prices may fall as much as 5 percent in the next 12 months. A number of factors are coming together to drive the market that way, the company said: tightened regulations, a surge of debt maturities and property sales by publicly traded landlords.

Pimco’s predictions are contained within the company’s aptly titled report, “U.S. Real Estate: A Storm Is Brewing,” which was released on Monday. The company buttresses its argument by noting that improving fundamentals haven’t been the primary driver of higher CRE prices in recent years: “Consider this: Since the fourth quarter of 2009, overall office prices have doubled (as have general CRE prices), yet national office rents have risen only about 15 percent. The primary price driver for U.S. CRE assets instead has been capital flows.”

Now capital flows are growing unstable, Pimco says. A number of factors are vexing the flinty hearts of moneymen: fears over interest rate hikes, political and economic uncertainty in China, and most recently, Brexit. “While this instability began in the public CRE markets, it has blown in to private CRE as well, particularly in non-major markets,” asserts the report.

Another factor in the storm is regulation: CRE liquidity has declined in recent years, driven by post-financial crisis regulations such as Dodd-Frank and the Federal Reserve’s Comprehensive Capital Analysis and Review, Pimco says. “This has intensified volatility for the sector during periods of broader public market sell-offs… Regulation will remain a headwind for CMBS and CRE for the foreseeable future.”