Alternating Growth and Cost Reduction of commercial real estate

Thus, in the early 1990s, downward adjustment of prices in this sector led to a significant increase in expenses on bad debts of banks and other financial institutions and made a significant contribution to the slowdown of the global economy. In the recent business cycle, on the other hand, real estate has changed significantly less. Over the past five years, housing prices have certainly risen sharply in a number of countries, but, with some exceptions, commercial property prices have remained well below a decade ago.

It is believed that this “absence” of the commercial real estate cycle is partly due to the rapid spread of securitization over the past decade for three reasons. First, new instruments replaced traditional bank financing and may have helped smooth out capital inflows into the sector. Secondly, the development of market methods improved the transparency of information and, possibly, strengthened the discipline of actors. Finally, issuing bonds and bonds intended for real estate trading has extended the risk of commercial real estate to a wider circle of investors. However, these structural changes do not imply the disappearance of the commercial real estate cycle. Most of the lack of a boom in the late 1990s can be attributed to the slowness with which the excess capacity accumulated during the swift end of the previous decade was absorbed. In addition, deeper integration with financial markets cannot protect commercial real estate from all shocks; new sources of volatility may appear.

Few English-speaking countries know about the boom in commercial real estate. In this group, prices are relatively stable after a sharp decline in the first half of the 1990s. In most European countries, markets have recovered sharply from the same period, but prices are still well below expectations. real conditions, to those that were ten years ago.

The only notable exceptions are Ireland and the Netherlands, where they have grown to record highs in recent years. In Japan, they continue to decline, increasing pressure on the fragile banking sector and a sluggish economy. Today, the global economy is drying up, and financial institutions are experiencing growing losses on their loans to businesses. Commercial real estate, on the other hand, works well, and in most cases the banking sector has so far held up well. This situation is reflected in the historically low default rate on loans for commercial real estate. In addition, real estate in recent years has provided solid returns that exceed the returns of stock market indices, and is an attractive way of diversification for investors. Demand plays an important role here. Some sectors, in particular technology, the media and telecommunications, as well as tourism, are declining. This contrasts sharply with the situation in the early 1990s, when the main problems arose due to oversupply. An increase in the vacancy rate and short-term defaults cannot be ruled out, but since construction in most markets is proceeding at a moderate pace, conditions in the region look more favorable than in the early 1990s. most countries.

The recent good performance of commercial real estate is partly due to the mild slowdown in global activity and generally low interest rates. However, this can also be explained by the fact that in many countries this sector did not experience escape in the late 90s. Looking back, this lack of cycle can be explained by the emergence of innovative financing methods in the last decade. New tools appeared when traditional sources, such as banks and insurance companies, declined. Since then, negotiable instruments (stocks and bonds), in particular, have grown rapidly and gained new significance. Full tracking of the role of market-based financing for commercial real estate is challenging. Given the nature of intermediary structures, funding levels can be very complex and vary widely from country to country. In addition, the available information is rather fragmented. Nevertheless, the main trends can be identified.