THE U.S. housing market continues to plod along for the most part, but commercial real estate is showing signs of recovery.
That’s according to a report published earlier this month by JPMorgan Chase. The huge bank is seeing pockets of opportunity for investment in commercial real estate.
That’s good news for a sector that not long ago was feared to be the “next shoe to drop” in the country’s real estate collapse. Thus far that hasn’t proved to be the case.
To be sure, as the report points out, all is not rosy in commercial real estate land. The rapid growth of online shopping has caused many retailers to avoid bricks-and-mortar expansion. Fierce competition among landlords for tenants has pushed down rents. Tight financing has made it difficult to develop new projects. And falling property values have made refinancing loans problematic, which has pushed some properties into foreclosure.
Some of those problems are due to the same factors that caused so much heartache in residential real estate: lending standards that got too loose during the boom. Many commercial properties were financed at excessive valuations with little owner equity, and a lot of those properties have since fallen on hard times.
But the JPMorgan report makes clear that the commercial boom wasn’t nearly as explosive as the residential one. That means the market isn’t as oversupplied and is hence bouncing back more quickly as the economy begins to recover. While there’s still plenty of pain for people who bought in around 2006, the report states there are now opportunities for fresh capital.
That’s probably part of the reason why real estate investment trusts, or REITs, have been among the stock market’s best performers this year. Investors also like REITs because they pass through most of their cash flow, leading to yields of 4 percent or better amid a low-yield environment.
Because of that run-up, the JPMorgan report thinks there are now better opportunities in commercial real estate than REITs. The firm is putting money to work buying commercial real estate loans, particularly from overseas banks looking to lighten their exposure.
That process of stronger hands taking over ownership should avoid the glut of foreclosures still ongoing in the residential market. As the report points out, the problem in most cases is the quality of the owner, not the quality of the actual property.
Many investors and businesses seem to agree with the report and see good opportunities in commercial real estate. Numerous commercial properties changed hands in the last month in a combination of business owners buying their own places and investors banking on better days ahead.
If the JPMorgan report is right about the rebound in commercial real estate, it will be one less headwind that the U.S. economy faces on its long road to recovery.