Commercial real estate in crisis
The recipe for a crisis always consists of many ingredients. Short-term shocks often occur long-term structural effects and economic developments. The current crisis of Commercial real estate in or from the USA is structured in this way. First there is the sharp rate correction. That means the key interest rate went from 0.13% to 4.88% in three years, it increased by almost 5 percentage points.
The interest rates for real estate loans shot up correspondingly. This fact alone could result in follow-up financing problems. Variable interest rates cause problems for many portfolio holders. In the next five years need loans for Commercial real estate volume over 2.5 trillion (specifically: 2,500 billion dollars). This corresponds roughly to the national debt of Germany.
At the same time, the structural change triggered by digitization is taking hold more and more: instead buying in retail stores or in shopping centers, people buy increasingly conveniently online. This trend got a booster due to the Corona measures. Likewise, by the way, like the trend towards home office. Back to normal? Not at all! Many employees, but also executives, were able to become friends with the new workplace model, are happy without daily traffic jams and lifetime loss. Sure, you want to and can do without direct social contacts in the office neither. But it makes a difference whether you commute five days a week or only one or two. And companies can save a little bit too. In general: together with vacation and sick days you don't need that much office-space anymore.
Then there are massive waves of layoffs – just think of the Facebook group Meta, the Google group Alphabet or Twitter. This also explains the extremely low occupancy of only 60 to 70%. This is of course poison for a market with significantly higher prices struggling with funding costs. Yields therefore only know one direction: down. If this is to attract investors, only significant price reductions will help.
Crises that can be predicted are no crises. Simply because one can prepare. Yes, maybe a few small banks will go bankrupt because 70% of the commercial real estate loans are held by small banks. And also the speculators are already betting against office real estate. Politicians and the FED are becoming the problem for the banking industry but know how to postpone once and once more. But commercial real estate is going down once in the price. All commercial real estate?
Let's take a look at the different characteristics: Currently most office and retail space are structurally affected. Also previously hyped shopping malls are likely to continue to face vacancies and their investors, therefore, with weakening yields have problems.
Among the winners of structural (and demographic) change are exotics, such as logistics centers, retirement homes and also hotels. The reasons are obvious. Hotel managers are constantly changing the market and are used to the necessary adjustments or proactive innovations. At the same time, hotels that are no longer up to date fall entirely quickly out of the market. The market laws may seem harsh, but ensure a "healthy" population.
So if you want to continue investing strategically in real estate, you can't avoid hotels, should, however, avoid office and retail properties. Even residential real estate are in Germany in the short term for political reasons and - in the medium to long term - for demographic reasons are not recommended.
In each generation, the population decreases by 30%. Even massive immigration can hardly avert this decline and the associated price stagnation or correction. These things are different for hotels: the weakness of the other real estate classes in particular could lead to a lead to increased demand from investors and cause prices to rise. Banks enjoys the financing of long-term and very secure investments in hotels with an excellent reputation. And as long as the return is higher than interest rates or interest rates are lower than inflation, one cannot be wrong.
However, in order to take advantage of the opportunities arising from the crisis that is currently building up, it is important to be quick. Because the selection, negotiation, purchase and financing process of a multi-million dollar property takes a few months. HOTELINVEST will be happy to assist you in all phases. Get it on!