Wednesday, January 09, 2008

Cheap buildings...for foreigners?

I have worried in past posts about whether investors are paying too much for office buildings, and whether we will begin seeing substantial declines in prices soon. Some commercial real estate people have told me that my worries are misplaced--that while buildings are expensive in dollar terms, in pound sterling or in euro terms or in RMB terms, they are very reasonable.

There is only one problem with this line of reasoning: rents for US office buildings are denominated in dollars! This means that from a European point of view, the income being produced by these buildings is declining.

The good news is that commercial buildings generally do not now receive the generous loan terms that homebuyers enjoyed recently. Loan-to-value ratios are pretty low, and debt-cover-ratios are pretty high, so a meltdown in the commercial mortgage market is not likely. But I would expect those with equity positions in office buildings to not be happy about the next couple of years.


Anonymous said...

Couple of thoughts:

There are offshore buyers that are paying insane prices for assets here, with puhlenty of cash (too tired to list specifics). One has the feeling that, like in Israel, many of these buyers are just moving the money in to launder it, or park it.

The larger commercial properties - yes, ltv's are low, etc., but there is a huge boom right now in very high ltv commercial mortgages for smaller properties, under the $5 mark.

Theorist said...

...or retail properties as purchasing slacks off

... or industrial properties as manufacturing continues to move to other countries

... or multifamily properties as folks are less and less able to pay their rents.

Anonymous said...