Next Asset Bubble Cracks: It’s so Big even the Fed is Fretting

Commercial Real Estate’s boom-and-bust cycle heads south.

Commercial real estate’s eight-year boom reached such breath-taking levels that even the Fed has been pointing it out as one of the reasons for tightening monetary policy. The Fed is worried because of the size of the sector, its leverage, and what it did to the banks during the Financial Crisis. And now commercial real estate prices are heading south once again.

Green Street’s Commercial Property Price Index, which tracks the value of property owned by real-estate investment trusts, fell 0.4% in May to the lowest level since May 2016:

This is not happening because there is some sort of crisis. And this is not a crash, as during the Financial Crisis, when the spigot was suddenly turned off and liquidity disappeared overnight. Instead it’s a slow process that is happening despite super-low long-term interest rates, enormous liquidity in the markets, and super-easy financial conditions powered by yield-chasing risk-blind investors.

One of the primary drivers of the decline are the values of retail malls that have been getting hit by store closings and bankruptcies of their tenants as brick-and-mortar retail is melting down. So the sub-index for malls fell 2.8% in May and 5% for the past three months, and is down year-over-year. Other weak areas are apartment buildings. But industrial space – such as warehousing, one of the beneficiaries of the shift to online retail – remains strong.

Boston Fed President Eric Rosengren, one of the earliest advocates of unwinding QE, started warning about the CRE bubble last year. A couple of months ago, he gave a presentation on what CRE could do to “financial stability,” with some stunning charts.

The “significant decline in collateral values” of both commercial and residential real estate was “the root cause of the financial crisis,” he said. Currently, financial institutions hold $3.8 trillion of CRE loans:

  • Banks: $2.02 trillion or 53% of total
  • Life insurers: $460 billion or 12% of total
  • Government Sponsored Enterprises (such as Fanny Mae) and Agency commercial mortgage-backed securities: $521 billion or 14% of total
  • Non-Agency commercial mortgage-backed securities: $544 billion or 14% of total.

In terms of the banks, it’s the smaller banks (less than $50 billion in assets) that are on the hook: they hold $1.2 trillion of CRE loans. Larger banks (over $50 billion in assets) hold $767 billion. In other words, exposure to a CRE downturn is going to hit numerous smaller banks least prepared to deal with it. And that’s what the Fed is worried about.

Industry professionals have been expecting the downturn for a while. CRE runs in big cycles of magnificent booms and terrible busts. After about six or seven years of boom, everyone starts looking for signs of the next bust. And these signs are starting to pile up.

This shows up in commercial real estate transactions. Over the first four months in 2017, CRE transactions dropped 17% year-over-year, to $121 billion and have plunged 30% from the same period in 2015, according to Real Capital Analytics.

“Those participants focused on the priciest deals are facing the biggest challenges in the current market,” writes Jim Costello in the report. Large transactions – those over $500 million – experienced the sharpest decline:

The Q1 2017 deal volume for these priciest deals was down 44% from peak values. The deals priced from $100 million to $500 million had the next sharpest decline, down 10% from peak values. All deals in the smaller ranges have activity that is essentially unchanged.

But he had some soothing words, ironically by comparing the current situation to the Financial Crisis:

Still, conditions are still far more favorable for the investors active in the $500 million-and-greater space in the current market than in the aftermath of the Global Financial Crisis. Activity for the priciest deals fell from a 4-quarter trailing peak of $231 billion in Q4 2007 to only $1.7 billion by Q3 2009. So, in the current market, it is not like the past where the big game disappeared, there are simply fewer mastodons out and about.

So this is just an early stage in a drawn-out painful down cycle of CRE that will maul loan-by-loan the smaller banks, and it will hit REITs and crush mall REITs, and eventually it will rake holders of commercial mortgage-backed securities over the coals, but unless something big and unexpected happens very suddenly and turns this into a “crisis,” this downturn – unlike the last one – will take its time.

The credit cycle has already turned sour, and the Debt Slaves are beginning to buckle under their loads. Read… Great Debt Unwind: Bankruptcies by Consumers and Businesses Jump

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  61 comments for “Next Asset Bubble Cracks: It’s so Big even the Fed is Fretting

  1. akiddy111 says:

    Great graph. Hits squarely between the eyes. The FRED C&I loan chart seems to be behaving the same way.

  2. beadblonde says:

    There’s so much CRE for lease in the Midwest that I have no idea where they hid the last crash.

    • Neal Woods says:

      Funny thing is, you see the same thing in areas with red-hot residential real estate markets like where I live south of Pasadena, CA. This area is near-50% mostly New Money Chinese and their families, with every main street packed with restaurants that mostly close down after a year or two, alongside tons of vacancies. These families seem too focused on affording overpriced university tuition (banking is heavily represented on boards of trustees) to spend on much of anything else. They may be suspicious of cashing out home equity, but cannot escape paying banks for unaffordable “assets” like the interest occasioning a $250,000 education, with the university happy to abet this unsustainable farce. How can local businesses hope to offer the one thing these families wish for: namely, for their kids to have future income?

      Every twentysomething I know feels strapped and most are heavily in debt in what’s supposed to be a bright spot in this economy, watching out for what’s going to bail them out.

      When are people going to start demanding fiat money be used to fund the consumer directly, instead of the banking institutions that indirectly bankrupt the consumer and NOW commerce?

      • Kent says:

        Never. The average person has no idea how the federal monetary system actually works.

        • Gershon says:

          “It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford, founder of the Ford Motor Company.

        • CrazyCooter says:

          But it is easy to learn now.

          I think this is the big “broken gear” in the traditional propaganda machine – they just don’t realize (until after the fact) that people can figure out the lie in the story (assuming the proles are interested in figuring it out).

          What I can’t decide is if this is on purpose – to tag the ones who do for later removal from the gene pool (and let’s face it – everything you do online is forever and too much like a fingerprint). Or if they just think they are that smart.

          Time will tell.



        • Andrew says:

          What resources would you and others recommend for people who want to understand the money/banking system? I studied economic theory but I left surprisingly ignorant of how the economy works.

      • Jim H. says:

        I like your comments. I have been visiting southern California repeatedly for 30 years and intensely the past 3 months. I live in Colo. and am looking to move somewhere in or west of Phoenix. There is much to live about California; however, it is obvious to me and anyone, who cares to look closely, that Calif. is in big financial trouble unless the governments policies and priorities are changed. Too much money is being sapped out of private hands by grossly overpriced higher education and wasteful government spending. The infrastructure rot is everywhere one looks but the progressive politicians continue to welcome all immigrants no matter what burden they impose on the state. Global warming spending, free medical care, lavish public employee pensions…the list goes on and on of misplaced and inefficient spending. I’m looking to locate to Arizona or Nevada and take my money where it will be treated better.

        • Dan says:

          I currently live in California, and I agree. Illinois just fell, and they’re making matters far worse by raising taxes 32%. I was considering Texas, possibly outside the Austin or Houston area, and buying some land. In the SF Bay area, the majority of wealthy people I see are either Chinese with their families, or retired older Americans who were fortunate.

          I have already made the moves to shift my wealth over to metals and cryptos, and out of the dollar. I am originally from the Midwest, and I hear of Arizona, and Nevada, but I was wondering if anyone here had any thoughts on Texas as a possible destination? I’d be grateful for any suggestions, and insight to be better prepared.

          By the way, I feel like I’m one of the more “aware” millenials of what is happening on an economic level, and feel bad for those who are “asleep at the wheel”, but in the end, you can only do so much for others.



      • Ambrose Bierce says:

        The mall collapse will end when they repurpose this land. Right now in SD CA they are considering a spec election for a “privately funded” remodel on their empty sports stadium. From NFL to MLS, football to futbol. Included is a dual use shopping activity theme park, in Mission Valley, the sort which local redevelopment agencies tend to propose when they gentrify. The same kind of project failed in Carlsbad last year, prop A, despite the councils support and heavy one sided YES advertising. Two takeaways, there is still a lot of hot money out there looking for these projects, despite CA winding down their state redevelopment agency, and there is a lot of public antipathy. The retail mall is so 60s, and of course there was plenty of opposition to them when they were built. If the rents are too high in these theme park boutique ersatz consumer villages are not your thing the real business opportunities are in so called industrial parks, concrete tiltups, where rents are low, you get a few feet of grass, and a view of the sagebrush.

        • consumer discredit says:

          With so much land available and for sale I don’t the mall parcels ever being more than brown fields. If ya got any sell it now.

        • Ambrose Bierce says:

          Retail malls built in the 60’s are now prime RE. They repurposed the old Hollywood Park racetrack into a sports stadium.

        • Edgar Poe says:

          “sports stadium”

          Another money losing sector ready for a wave of defaults.

      • Green Rock says:

        I don’t post here often, but your comment about the 20-something’s is true. Their high college debt and the inflated prices have robbed them of the rightful freedom of youth. They can’t go anywhere, or do anything without being based at their parent’s home. It’s a robbery.

        It’s another vicious high cost to this Federal Reserve Ponzi scheme. The old will be robbed, even as they watch the young failure to explore life wither under a deadly blight of debt. Pure evil.

  3. Laker says:

    I am involved in the new york city metropolitan area as a lender, buyer, operator and as an “observer”( as observer, meaning to say, I lost out on investment properties that I made offers on, that were not accepted by the brokers/sellers due to higher offers made by more optimistic investors/gamblers). Now a lot of those chickens are coming home to roost, with those optimistic buyers, going in to a deal at “projected” cap rate of 3.5% with so called upside, seems that the upside became a backside….and there is not enough cash flow to cover expenses, repairs, mortgages etc….cash call to the invester/partners especcially the foreign partners are becoming too much for them to evidenced the disputes going on here now, I think its time for me to start giving my offers on those properties again… those optimitic owners…

  4. J Bank says:

    Commercial Real Estate (CRE) is an overly broad term. Since multi-unit apartment buildings (5 unit and up) get lumped in, and make up a huge portion of it, I think it might be a little premature to call it a bust. Retail space, especially lower tier malls, are getting absolutely clobbered.

    Apartment buildings are expensive right now since rents are so high. If rents can come down to earth a little bit (more than they are now… I’ve been following your info on them), then you will see asset prices go down. I’m in San Diego where rents just keep going up and EVERYONE is still trying to buy multi-units… except for the smart money that realizes it’s cheaper to build their own and that this simply isn’t sustainable.

    • Joe says:

      In Seattle are all commercial lots they are building as apartments..
      Couple commercial lots are now town homes and selling in mils.

      Because of housing market commercial lots in good neighborhood are changing as apartments or townhomes

      • Jon says:

        I see the future of all malls like this.. being converted to housings..
        what does it mean for housing prices when there is abundance of houses because of malls being converted to housings…. along with millennials inability and unwillingness to buy homes..

        • Bigirishguy says:

          Inability, not unwillingness. We’d love to be buying homes, but prices in area that have good paying jobs have ballooned beyond our ability to either pay or rationalize paying.

    • jb says:

      the small mall here in crystal river, seems to be on life support. 2 anchor stores vacated , one being kmart . Maybe a 35 % vacancy rate. I see small businesses moving in for a brief amount of time then abandoning their enterprise. The mall just leased space for above all things a massage parlor. when you walk by, the workers in an Asian accent “hawk their wares”. It is surreal to walk around the mall .
      just a side note: it seems that many of these CRE loans are structured with a balloon payment due before the full amortization period.

      • J Bank says:

        Yup, almost all of the loan issued by banks have balloon terms. That means that these cycles are more volatile, as Wolf points out. I’m curious to see what happens to Westfield. We have a few of them here in San Diego, one of which is about 40%-50% vacant. A couple are still doing very well (the ones with a luxury focus). It’s really reinforcing the haves-and-have-nots story line.

  5. TJ Martin says:

    ” Risk blind investors ”

    That pretty much sums up one of the major factors creating the Potemkin Village we’re in in a nutshell ( emphasis on ‘ nut ‘ ) Albeit being a bit more blunt as I am I’d call them delusional risk blind investors . And yet looking at todays markets they’re barely nudging downwards despite a wave of bad news from the economy , jobs , RE , spiraling debt , bankruptcies , politics etc over the past 10 days . Begging the question ;

    What are those folks on / putting in their water ?

    • Frederick says:

      And with the risks surrounding this Qatar thing Gold and Crude are both down Go figure

    • Jon says:

      I don’t see absolutely any bad news in MSM.. Per MSM, everything is awesome…

      • Petunia says:

        My cable bill just went up $20 and they won’t give me a better rate. When my contract is up next year – they are gone.

        • CrazyCooter says:

          In the last – literally – three days – I have had several (3+) friends complain about new cable rates and internet rates (provider here is cutting middle plans and forcing customers up or down the product ladder) and they are NOT happy.

          Haven’t owned a TV for going on 20+ years. I rent netflix dvd (by mail) at a modest fee.

          Try it. Everyone else is.



        • Jarhead John says:

          Have never had cable/satellite in my 64 years on planet earth… I have saved over $50,000 just by using “Rabbit Ears”…

    • TJ Martin says:

      .. a correction to my previous 11:59 am comment … as of now the DOW and the NASDAQ are …. up .

      The logic of illogic coming to the fore …. again

      • J Bank says:

        “Irrational Exuberance” and “euphoria” usually are the last step. I’m sticking to proverb: sell in May and go away!

      • CrazyCooter says:

        I am not the student of history I want to be (aspiring!), but in my opinion (dumb red neck here) this is the worst time to be in ANYTHING but TreasuryDirect bills.

        If you got more money than that – not my problem.



    • Maximus Minimus says:

      Not so delusional if you are betting with someone else’s money. For example, you are a pension fund manager that requires certain returns to appear solvent, and you plan soon to retire, or move on. The beneficiaries are holding the bag of which they are blissfully unaware, for now.

      • roddy6667 says:

        All the unions and “collective bargaining units” in government used this approach. The politicians knew that by the time the chickens came home to roost they would be retired or dead, so they agreed to the outrageous demands of the unions.
        I have no sympathy for any of them, including the workers who will get their pensions adjusted.

        • Maximus Minimus says:

          You might have a point there, but maybe they have some fiduciary duties, but then can point out that so do the last three FED chairs (under oath), and on that account should all be behind bars.

  6. Petunia says:

    All the economic and social problems in the country are on full display at the mall. I think the topic is now greater than just the economic aspects.

    • Meme Imfurst says:

      When the Spanish ships lay anchor off the Central American coastline, the Indians pretended they were not there. Even as the Spanish began to brutalize the Indians, the Indians thought the Spanish were GODS.

      Human nature is not so easily changed. Not much difference between this story and what goes on now. Replace Spanish with bankers and speculators, and Indians with you and me, and you get the picture.

  7. Jon says:

    All these numbers are illuminating but I see no stopping of asset prices appreciation..

    It is surprising to see the amount of money people have …

    • JZ says:

      You mean how much paper people are having, right?
      I think the asset inflation is too slow for people to understand what they hold in their hands.
      That’s the CON game Fed is playing and when I read more people realizes asset inflation will never stop, my immediate feeling is that more people start to realize what they hold in their hands.

      Please central bankers, do your job and get asset inflates faster!

      • TJ Martin says:

        ” You mean how much paper people are having, right? ”

        There was a time not so very long ago when calling someone a paper millionaire / billionaire was an insult of the worst kind . Now it seems the term has become a full fledged compliment verging on an honorific

  8. park playce says:

    Panic selling in my hood given the surge of listings.

  9. robt says:

    Some of the big kids started selling out last year – including huge rental holdings of apartments. They made their capital gains killing in the 7 year run-up.

    • Frederick says:

      I think Sam Zell started selling part of his substantial apartment inventory back in 2015 if I’m not mistaken I guess he wanted out early so as not to get swept up in another 2008 like implosion

  10. USCA says:

    Investors(in reality speculators) disappear without notice. This is exactly what is happening. I heard a real estate agent complain last week that buyers have completely disappeared and those with deposits down are walking away.

  11. michael says:


    Would you say commercial real estate is a leading indicator for the housing market? It might be useful to overlay this chart with one with housing prices. If 2007 was a bubble its pretty hard to deny we are in another bubbles. This explains all the CRE here in Santa Clara.

    • Wolf Richter says:


      “Leading indicator” … hmmm… good question … I’d say sometimes, but not reliably so :-]

      Here are some thoughts:

      Housing is so local that the national statistics might not react visibly if some markets crash and others boom, as has happened. It’s when many of them move in the same direction that the national indices show the movement.

      The corollary is true for CRE: For the national CRE index to move, several of the big sub-sectors would have to move in the same direction:

      Lodging has been weak for nearly two years. Apartments have been week for a year, as have been strip malls. Malls have taken a big hit over the past few months. Office is now flat-ish. On the stronger end are storage (though it has ticked down) and health care.

      So with more down-movement than up-movement in the sub-indices, the overall index has moved lower.

      Rents, which we discuss here from time to time, are linked to CRE via the apartment sector. And rents are linked to housing, but that link is very tenuous – and plays out, if at all, over the long term.

      CRE doesn’t have the same government support/subsidies that residential RE has. It could be that government policies drive residential RE higher even as CRE is grappling with reality.

      However, almost all asset prices rose in some parallel manner since the Financial Crisis, though with different timing and speed. It could be that they’re headed the opposite way in the same fashion. We’ve had some early declines, such as classic cars. And inevitably, there will be the last man standing, until it too buckles.

  12. Ehawk says:

    Chart means nothing.. in 2 months will be shaping upward. just like housing in SF and Vancouver and unemployment… wavy…

    Nothing crashes if anything people are doubling down now. At least here in the Silicon Valley. I just saw 3 old buildings in Santa Clara demolished to build 4, 4-story brand new commercial office space buildings right in the heart of SV. They just demo’d… they haven’t even cleaned the sites yet.

  13. Vespa P200E says:

    Time for RTC II or TARP II anyone?

    For those old enough to remember – Resolution Trust Corporation used up to mop/charged with liquidating assets, primarily real estate-related assets such as mortgage loans, that had been assets of savings and loan associations (S&Ls) declared insolvent

    “In terms of the banks, it’s the smaller banks (less than $50 billion in assets) that are on the hook: they hold $1.2 trillion of CRE loans. Larger banks (over $50 billion in assets) hold $767 billion. In other words, exposure to a CRE downturn is going to hit numerous smaller banks least prepared to deal with it. And that’s what the Fed is worried about.”

  14. unit472 says:

    While malls have their own problems I am curious about the lodging/hotel industry especially in tourist heavy locales. There would seem to be an inverse relationship between the traditional companies and the new ‘virtual’ companies like Uber, Airbnb even Amazon. A dollar of revenue for these ‘virtual’ companies is likely a dollar lost to the traditional taxi, hotel or retail sectors.

    In my condo building an owner has a unit he once used only in the winter. He was a snowbird. Now I notice people with luggage periodically
    getting on the elevator to stay for a week or two. I have no idea how many other units in my development are being similarly ‘transformed’ but guest parking seems to have become more crowded this year.

    As Mr. Richter has pointed out the condo glut in cities like Miami/San Francisco etc would lead one to beiieve that short term rentals are going to be a necessity for those who bought hoping to flip at a profit. OTOH asking HOA to subsidize a few owners turning their units into short term rentals so they can make the mortgage to say nothing of tax paying hotels losing rentals to virtual companies is a looming problem.

  15. Petrus says:

    The propertymarket in Oslo in Norway is also rolling over. Prices fell in May.
    Also – people I speak to in the oil industry say the layoffs in the sector are not over. The debt bubble this time is global – when it pops it will get nasty.

  16. Rob says:


    Decentralisation, the costs of operating in places like London/ NY are too high
    Remote working leading to less demand, particularly smaller businesses
    More supply being built, cranes everywhere in major cities
    The middle market being hollowed out in many industries meaning fewer firms will pay for prestigious offices and will take less space
    Ground floor retail units worth less as footfalls decline
    Higher interest rates pushing up cap rates, from 4% cap rates now
    Pensions selling as they get hit with duration losses on Fed hikes and leveraged RE players squeezed out

    The only positive I can think of is that after they fall in price, if you own them then you own a cash generative, cheap, real asset, which you can finance with paper, negative real rate, yielding debt. But that requires a price fall to set it up first.

  17. Gershon says:

    The Fed may “fret,” but they’ll keep on enabling reckless speculation with their “No Billionaire Left Behind” monetary policies.

  18. Barra says:

    It’s interesting how Green Street describe their data for May.

    Property Pricing Unchanged

    Newport Beach, CA, May 4, 2017 — The Green Street Commercial Property Price Index was unchanged in April. The index has been trending sideways recently, as higher cap rates have offset growing rental income.

    “Property values have been stuck at current levels for several months, as cap rates have been inching up,” said Peter Rothemund, Senior Analyst at Green Street Advisors. “There are a couple of exceptions to that trend, however. Prices of industrial and medical office buildings have both moved higher over the past few months.”

    • Wolf Richter says:

      You’re looking at the month-earlier report (dated May 4). The PDF file for the new report (it would be dated June 6 or so) is not available. But the data is available. Which is what I use. Maybe they stopped writing up the report or maybe the guy that is doing it is on vacation.

  19. Lee says:

    I noticed that the report for consumer credit in the USA for the month of April was released and it came in at US$8 billion against a forecast of US$15 billion.

    That is a huge miss and a huge fall from the previous report of US$19 billion.

    Wonder if those numbers are correct – it means a huge change has taken place somewhere.

    Also noticed that Japanese GDP growth was revised down by a huge amount for the last quarter. Much of that ‘growth’ in Japan comes from using a negative price deflator which was -0.8% for the year.

    Yesterday stats for Australian growth were released. For the year it was only 1.7% and the last quarter came in at 0.3%. Yet the wonks at the RBA are expecting growth to come in at around 3% for the next few years.

    Where is that going to come from with the banks and governments at Federal and state levels both hitting the housing industry – one area where there has been growth?

    Even that GDP report was IMO full of BS. Wholesale trade increase by a whole bunch from increased inventories which added 0.7% to the GDP growth side of the numbers. Retail trade fell.

    That increase in inventories was from the stockpiling of mineral exports because of bad weather. Not going to happen again next quarter and the prices for those stockpiles is falling and falling fast.

    April Australian trade balance data was just released and it came in at $A555 million vs an expected A$1.9 billion which was down from the previous $A3 billion………………

    Of course with all this “good news” coming out the Australian dollar has zoomed up past the US 75 cent mark.

    Must be something in the water these days as finance and economics have gone nuts.

  20. Jackoftrades says:

    Article below says 84,000 hotel rooms in the pipeline for California. Interesting that very very few are in San Diego despite the boom in the rental market there.

    Why isn’t there a hotel boom to mirror the rental boom?

    Sounds like SD is a hot money sink hole for foreign investors who buy up houses, jack up the prices (or leave them empty) then push the squabbling mouse people into rentals.

  21. Glad 2B Gone says:

    Central banker policies have inflated bubbles across all asset classes on a global scale. Stocks, bonds, residential RE, commercial RE, etc. all inflated.

    It is difficult to perceive any of these individual assets would deflate without a crisis that would deflate all the bubbles. All plates will keep spinning until the central bankers decide to deflate them, or, until the “free” ?? market loses confidence in the central banker policies.

  22. Rob says:

    Multiple assets have deflated sequentially since 2008. Ie the 2008 stimulus in the US and China lifted all boats initially but has increasingly lost power and assets have collapsed closer and closer to the core:

    Dubai end-09
    Greece 11
    PIGS 12
    Commodities 11-16
    EM 11-16
    Oil 14-16 and double dipping now
    UK june 16-

    What next:
    US retail
    US import/ labour arb industries if BAT tax is passed
    France, Italy?
    Chinese real estate?

  23. Boris Vian says:

    Question- does this affect the building of residential real estate, i.e. would this be one of many things affecting whether or not builders can build housing in California? It being so expensive here, they would have to take out bigger loans than in Texas?

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