Federal Reserve eyes potential bubble in commercial real estate market
- A potentially "overheated" commercial real estate market has economists predicting that the Federal Reserve might elect for steeper-than-expected interest rate hikes in the future, according to Bloomberg.
- At the center of the Fed's concern are the glut of expensive high-rise apartment buildings, the rents for which have reportedly weakened in New York City.
- Currently, the standard, measured interest rate hikes are expected to take place over the next year, but officials have cautioned banks to be vigilant in their commercial lending practices, and the Fed has left room for adjustments to its monetary policy.
Fitch Ratings reported that commercial mortgage delinquencies are expected to increase by as much as 2.4% this year after several years of declines. The Fed considers the commercial real estate market to include the office, apartment, industrial and retail sectors.
Despite a reported tightening in commercial lending, luxury condominium and apartment projects are still popping up in the hottest markets in the country. However, in the last year, there have been signs that some developers have recognized the potential for a surplus. In Boston, Simon Property Group put plans for a 52-story condominium project on ice due to a substantial supply of units throughout the city. The mixed-use skyscraper would have added 542 residential units to the city's stock and increased retail and dining space by 45,000 square feet.
A similar situation occurred in Miami last August when a Miami developer put the brakes on a 298-unit luxury condominium development after dismal presales of only 15%. According to the Miami Herald, other developers in the area were falling in line with this wait-and-see strategy as well.
In contrast, the single-family housing industry, which suffered a near-cataclysmic collapse in the Great Recession has seen a more gradual, bubble-free recovery, with the latest report from S&P Core Logic Case-Shiller indicating a 5.5% annual increase in home prices.
In December, the Fed raised interest rates by 25 basis points to a range of 0.50% to 0.75% — which represented only the second rate increase in a decade. Fed officials have said they expect to incrementally raise rates by a total of 75 basis points this year.
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