Real estate prices in most areas of the country have been on a non-stop rise since 2011, giving investors some of their best returns in years. This rapid appreciation has led some investors to wonder whether there may be signs of another real estate bubble in the making. However, there are currently no clear signs that would indicate this to be the case.
It’s easy to see why some real estate investors are getting a little anxious. The Chicago commercial real estate market it about to have its best year since the all-time highs of 2007, and will likely surpass these this year. Prices in Los Angeles are also at near all-time highs. New York is experiencing similar growth trends, with the Macy’s store in Manhattan now worth more as a real estate holding than the total value of the company’s retail operation itself.
In short, the real estate market may be having a case of “too much good news”, leading some wary investors to worry about another potential bubble forming. But others disagree and foresee more years of stellar growth before any slowdown happens. Unlike nearly a decade ago when buyers would highly lever their purchase of commercial real estate, buyers are now more conservative and putting up more of their own money.
The Federal Reserve’s fall meeting, coming in mid-September, will likely determine whether markets will stay frothy or cool slightly. Opinions are still split on which way the Fed will go: the possibility of a rate increase has been discussed for months now, but the recent slump in the US stock market may be enough to caution the Fed against doing anything that could slow the economy.
What should investors do if prices continue rising? Intense competition for quality, well-located properties continues to compress capitalization rates, thus lowering returns, and is forcing investors into 2nd Tier markets in order to achieve desired returns. These 2nd Tier markets are becoming highly desirable as the Tier 1 markets become increasingly harder to penetrate.
In addition, as global economic trends shift, US real estate investors might find themselves facing increased competition from overseas. With the recent decline of the Chinese stock market, for example, Chinese investors are looking for the stability of US real estate investments.
What is a prudent investor to do? Heading to Tier 2 markets is indeed a viable plan, but for those well capitalized and patient investors who are willing to pay a premium for trophy properties in Tier 1 markets, there are still some great properties available in the major urban centers.