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Pimco is out with an urgent warning about the US commercial real-estate market.
In a report released Monday, Pimco’s John Murray and Anthony Clarke wrote that the capital flows that propped up the market since the housing crash were decreasing.
And that spells trouble ahead.
From the report (emphasis added):
“Storms form when moisture, unstable air and updrafts interact. Similarly, 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 (CRE) that we anticipate could lower overall private U.S CRE prices by as much as 5% over the next 12 months.
Last month, Deutsche Bank analysts similarly warned about a decline in commercial real estate; they noted that various measures of on-the-ground spending were near or above 90% of the levels where they most recently peaked from 2002 to 2008.
Pimco observed that real-estate investment trusts – securities known as REITs that invest in real estate and trade like stocks – have recently been slammed together with the equity market.
They observe a 71% correlation between S&P 500 and REIT returns since the beginning of 2015. The S&P 500 has risen just 0.3% since then; REITs have also been virtually flat.
This trading pattern has placed REITs below their net asset value (their value, excluding liabilities, divided by the number of outstanding shares), increasing net sellers of commercial real estate.
Regulation will also continue to be a challenge, Pimco said. New rules since the financial crisis have prompted banks, which act as market makers in commercial mortgage-backed securities, or CMBS, to slim their dealer inventories.
Read entire Business Insider article here.