If you have had any doubt that commercial real estate is not the place to be putting your capital right now, take a look at the latest Q2 industry data. The vacancy rate jumped from 19.9% to 21.4%. Net negative absorption nearly doubled from 600,000 sq. ft. to 1 million sq. ft., while 723,896 in new space was completed. Closed sales plummeted from $87.2 million, to $45.9 million. Paying tenants looking to add space are staying away from the market in droves, easily renegotiating reductions in lease rates instead of committing to risky new purchases. The inventory glut is dragging prices down, scaring off marginal lenders. Several high profile bankruptcies of trophy properties have only exacerbated the pain. The capital drought looks likes it will get worse before it gets better. I would love to recommend shorts here, but the listed REIT’s have already been so crushed, I’d rather stay away. Look at the chart for Prologis (PLD). Pilots will recognize all of this as an irrecoverable flat spin, a twin pilot’s worst nightmare. Non-pilots should watch Top Gun.
Commercial Real Estate Will Remain in a World of Pain
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