This Hits the Wheezing Commercial Real Estate Bubble at Worst Possible Time

The last big enthusiastic buyer, China, is leaving the party.

Commercial real estate, such as office and apartment towers, in trophy cities in the US and Europe has been among the favorite items on the long and eclectic shopping lists of Chinese companies. At the forefront are the vast, immensely indebted, opaquely structured conglomerates HNA, Dalian Wanda, Anbang Insurance, and Fosun International. In terms of commercial real estate, the party kicked off seriously in 2013. Over the two years in the US alone, according to Morgan Stanley, cited by Bloomberg, Chinese firms have acquired $17 billion worth of commercial properties.

In the second quarter in Manhattan, Chinese entities accounted for half of the commercial real estate purchases. This includes the $2.2 billion purchase in May of the 45-story office tower at 245 Park Avenue, the sixth largest transaction ever in Manhattan. At $1,282 per square foot, the price was also among the highest ever paid for this type of property.

Most of HNA’s funding for this deal — one of its 30 major acquisitions since the beginning of 2016 — was borrowed from China’s state-owned banks. But HNA also borrowed $508 million from JPMorgan Chase, Natixis, Deutsche Bank, Barclays, and Societe Generale. This has been the hallmark for all Chinese acquirers: a lot of borrowing from China and some funding from offshore sources.

Similarly, Chinese acquirers accounted for about one-quarter of commercial property transactions in central London in 2016, according to the Morgan Stanley report. In Australia, over the past few years, Chinese firms accounted for 12% to 25% of all office transactions by value.

But now these conglomerates and other Chinese firms engaging in outbound acquisitions have run into a veritable buzz saw of regulatory efforts by Chinese authorities designed to accomplish two things: slow down these capital outflows; and keep the Chinese banks from getting perforated by their exposure to the overleveraged conglomerates.

The authorities put the banks under intense pressure to deleverage. And the banks put the conglomerates under pressure to deleverage. A number of deals have already gotten scuttled.

US and European banks too are getting second thoughts about funding these deals. Bank of America, for example, has already pulled back from doing business with HNA — “We simply don’t know what we don’t know, and are not prepared to take the risk,” BofA president for Asia Pacific, Matthew Koder, had said in an internal email.

Morgan Stanley estimates that China overseas direct property investment could plunge by 84% in 2017 and another 15% in 2018 — to just $1.4 billion. In other words, just a tiny trickle.

So what would happen to the US commercial property sector when the last big enthusiastic buyer, China, is leaving the party? Will the sellers get to dance with each other?

The party isn’t entirely over just yet: For example, Sunac China Holdings, now one of China’s most debt-burdened property investors after buying assets from Dalian Wanda, was able to sell $1 billion of dollar bonds last week, according to Bloomberg. So foreign-currency funding is still available to Chinese property buyers, but getting harder and more expensive to come by.

Commercial real estate prices in the US, after a seven-year boom, peaked last year. Green Street’s Commercial Property Price Index in July 2017 was below where it had been in June 2016. This marks the first year-over-year decline – albeit a small one – since the Financial Crisis. December had been the peak:

In many markets, transaction volume has dropped, as domestic buyers have become leery. Across the US, deal volume fell 8% in the first half of 2017. And Q2 (down 5%) was the third quarter in a row of year-over-year declines. “Investor caution” hurt higher-priced markets such as Manhattan in particular, according to Real Capital Analytics.

Everyone had been hoping that China’s formerly insatiable appetite for US properties would keep the market afloat and would let domestic sellers, after running up the seven-year boom, get their money out at peak prices.

But China’s big property acquisitions are likely to get much scarcer, with US and European banks less eager to lend to Chinese conglomerates; with Chinese banks under pressure to reduce their vast exposure to the conglomerates and their precarious deals at peak prices; and with Chinese authorities determined to stem the capital outflows. And this could hit the already wheezing commercial real estate bubble in the US at the worst possible moment.

Landlords are reading the memo, but it may be too late. Read…  Will Plunging Store Rents Slow the Retail Doom-and-Gloom?

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  48 comments for “This Hits the Wheezing Commercial Real Estate Bubble at Worst Possible Time

  1. Ron says:

    reminds me of Japan during the 80’s..

    • roddy6667 says:

      Exactly. They were buying up all the expensive penthouses and a lot of high profile commercial properties. They jumped the shark when they bought Rockefeller Center. Before the ink was dry on that deal, the commercial market tanked. The bottom fell out of residential properties, too. I was a Realtor in CT in 1988 when the market turned around and prices started to drop. It took ten years to reach the bottom and come back up to 1988 valuations.
      This is a great time to NOT be in the market.

  2. michael says:

    I personally welcome the collapse of this nonsense.

    • Frederick says:

      Me too The sooner the better

    • Gershon says:

      Reversion to the mean is going to be a financial Waterloo for the fools who rushed into the central bankers’ speculative bubbles.

      Got popcorn?

  3. TJ Martin says:

    The question is … will the same happen with all the Chinese investing billions into the US residential real estate market ?

    If so … yee hawww .. I can only imagine how far down prices will plummet … and it cant come quick enough !

    On a somber note though … sad that its taking the Chinese themselves as I predicted earlier to fix this real estate problem of ours created in part by them .. with once again China taking the lead on the world stage .

    • chip javert says:


      I understand your point, but I doubt the Chinese Commies give a damn about “our” problem; they’re only concerned about their capital outflow.

      • Crazy Horse says:

        “Chinese Commies” LOL
        In the Age of Tweet, words cease to have meaning.

    • Shawn says:

      Actually, the questions is will Chinese banks continue to loan out large sums (5, 10, 15 mil Yuan) of money to it’s citizens? If the answer is yes, then vast sums of laundered money will continue to make it’s way to our shores and into our housing market. It’s a shame, unlike Toronto, our leaders are far too corrupt to do anything about such rampant speculation.

  4. mean chicken says:

    Chinese bought into movie cinemas as well, just as crickets took over the shopping mall and Internet entertainment is growing..

    As an aside, Smithfield pork products seem much saltier than they used to be, not sure if that was required but not nearly as good as before, IMO.

  5. Gershon says:

    Now that employment is supposedly soaring, what creative excuse will Yellen trot out as a pretext to go on bilking savers out of interest income?

    • TJ Martin says:

      ” Supposedly ” being the key word .Taking a cursory look around even my somewhat tawny upper middle class neighborhood I’m not seeing any real on the ground evidence to support their ‘ supposed ‘ claims . Fact is .. just the opposite

      • alex in san jose says:

        TJ – You mean “toney”? Although if people are not watering their lawns, tawny might apply.

        Even I’m forgetting how things were before the crash. In the middle of the day you just didn’t see people around; they were at work. And people in stores were hurry-hurry; they had to check those customers through, and the customers had places to go. Now it’s slow’n’sluggish, and the lights are dim to save energy. Lines everywhere. Waiting in line as a way of life. San Jose, CA is the most waiting-in-line place I’ve ever seen. I was in Fry’s last night and the line was huge, 40 or 50 people? – because they had two checkers and the checkers were in no hurry.

        One bright spot: The DMV. Since so few people can afford to keep a car these days, the DMV is almost fun to go to. I last went there to renew my driver’s license, on the bus of course. The wait was almost nonexistent.

        • Wolf Richter says:

          You renewed your DL in person??? Mail is so much easier.

        • David G LA says:

          Alex – it’s Tony

        • alex in san jose says:

          Wolf – I think I had to do it in person, for the eye test or something.

          Hey it’s silicon valley! We pay our bills by mail, and last night, I got a wild hair to walk over to Fry’s and buy a nice shiny new Fluke 116 multimeter. Well, Fry’s idiocy saved me from Fry’s high prices. Credit/debit cards completely baffle them, and I was not able to buy the meter. I walked back here, finished the testing with the junky meter we have here, and looked up the Fluke 116 on Amazon; it’s $24 cheaper and shipping’s free.

          I do my banking in person. Basically depositing the paper check I get once a week. I fill out my tax forms on paper.

          As a general rule, the oldest technology is the go-to here.

          I *will* buy a toaster oven from Fry’s, but I’ll bring cash.

        • Max says:

          “I was in Fry’s last night and the line was huge, 40 or 50 people? – because they had two checkers and the checkers were in no hurry. ”

          Frys cashiers are minimum wage. This is emblematic of companies hystericaly screaming about ‘not finding qualified workers’.

          -You must be qualified to live on saltine crackers and sleep in your car to survive off a Frys salary.

          The same applies to engineers but on a somewhat higher level – ‘ you must frequently sleep in your office to make deadlines and live off mountain dew and pizza’

          Since you were willing to wait in line I assume company enabled slow-downs are happening all up and down the supply chain- things are happening slower because no one wants to raise wages.

  6. Dominic says:

    The US is exceptionally gifted at producing And selling overpriced assets to emerging economies and unsuspecting foreign investors. Japanese 80s inflated real estate buys , European MBS fiasco, and now Chinese Real estate oragy.

    Welcome to cowboy capatilsim!

  7. OutLookingIn says:

    Asset deflation. The pin that deflates the bubble.

    The derivative sphere will suffer a catastrophic shock.
    Specifically, the CMBS (Commercial Mortgage Backed Securities) which have been mixed and inter-twined with dollar based property bond debt.

    These “weapons of mass financial destruction” will have a knock on effect of massive proportions. Considering the vast, incestuous inter connected financial web of global, opaque banking operations.

    When you have tens of trillions of debt obligations, under-pinning hundreds of trillions in derivatives, the quality of the underlying collateral is called into question. No one knows. That is the “Black Swan” which is hiding in plain sight of everyone. What we have is extreme greed and widespread ignorance, disguised as complacency.

  8. michael Engel says:

    Since 2011 the large western banks “credit” flow to China was cut. by half. China had few positive tailwinds to counter the negative headwind :
    1) For decades China hard earned saving was invested in $UST.
    When Fed cut rates to zero their investment increased.
    They took profit.
    2) In 2014 China, the biggest user of commodities, got a huge 50%
    discount on commodities prices. Everything they touched became
    half price, on sale.
    3) China became the largest car market, cheap oil encouraged production/consumption.
    4) In 2014 China had opened their stock market to foreign investors.
    In Oct 2014 every stock market was hit, but the Chinese stock market
    was a refuge to the smart money, because everything is great about China and and their stock market formed a huge bubble.
    With a lot of Chinese central bank credit, foreign credit and half prices
    of basic commodities, it made sense to build & invest in RE.
    Bismark : “fire & fury” on the Chinese $SSEC & RE.

  9. kam says:

    Incredible real estate bargains coming to South Asia soon. The only question will be whether it is Japan, South Korea, North Korea or China.

    And the cherry on the cake will be no electricity bills since your property will glow in the dark.

  10. Cashboy says:

    Where maybe the west has gone wrong is that it lets foreigners buy freehold land and buildings in its countries.
    I, as a foreigner, cannot buy any freehold land in Asia.
    The prices in the big western cities are inflated by foreign buyer demand.
    London has been a great place to launder money and this is evident from the amount of foreign owned property.

    • Brian Richards says:

      As I remember, one can purchase freehold real estate in Malaysia.

      • alex in san jose says:

        Back in the 80s I heard the skinny on living in Malaysia.


        Just. Don’t.

        They have any number of reasons to kill you on sight. If you are so unfortunate as to find yourself there, do not drive your own car as the slightest fender-bender will get you killed. Or any of a number of other things. HP, as well as some other companies did manufacturing there and it was less friendly than Somalia or Yemen for anyone unfortunate enough to get sent there for business.

        • BobT says:

          You were listening to fake news. I have been living in the peninsula for decades and this opinion is just plain wrong.

        • doug says:

          I have been to Malaysia and Kuala Lumpur is nicer than many U.S. cities .Has some of the best infrastructure in SE Asia, listening to people that have never left the country is hilarious akways so fearful and full of wrong information.

        • william says:

          There is a reason why you never see a Malaysian restaurant in America.

        • Wolf Richter says:


          There are some good Malaysian restaurants in San Francisco, America.

    • roddy6667 says:

      Americans believe they own land freehold, until they get a bill for the rent 2X a year from the real owner. Property tax is rent. You pay rent to the landlord.

  11. tony says:

    holy chit

  12. Old Engineer says:

    For funds (and banks) run by professionals to invest so much money in a market at such “bubble” heights they must have a (to them at least) logical reason. Two possibilities come immediately to mind. One, perhaps they are in it for the long haul, rather than as a speculation. The Chinese are reputed to look very long term (this may be a national stereotype, I don’t know) in their planning and investment. Or it could be a classical money laundering situation in which if they can get their dollars out of China and keep 50% or more they will be content. It seems as if China is awash with dollars and with large enough profits that a 50% hit to get the money out might not bother them.

    • Rates says:

      They are so long term, they were overtaken by the West and have imported Western culture in a large scale manner. No doubt that’s part of some master plan.

      Civilizations rise and fall. As long as those nukes remain silent and Yellowstone does not erupt anytime soon, then that’s how it will be forever and ever. The US and Western Europe are now on a downward slope, but in the future, there’s nothing that prevents them from rising again.

      • Thor's Hammer says:

        The only factors in the real world that matter are a long dormant volcano and whether humans can avoid nuclear war? And that’s how it will be for ever and ever—?

        The fact that industrial civilization has burned through most of its cheap and accessible energy base and has no comparable replacement is irrelevant? As is the fact that American agriculture is based upon mining ancient aquifers that every year become more exhausted and deeper to access? Or the fact that the world’s oceans are on an irreversible course to loose 25-50% of their food stocks within the next half century? Or that we are causing a Sixth Extinction that may remove half the earth’s species?

        Delusion is the opium of the people.

        • Robert says:

          The good news is that if there really is global warming and C02 production, it stimulates photosynthetic plant growth (with attendant oxygen production as a byproduct). I will readily admit the oceans are a mess (physicians have been cautioning pregnant women for years now to avoid eating tuna or shellfish more than twice a month due to mercury levels), with fertilizer runoff into rivers simply adding to the toxic broth. I was shopping for a new fridge this week and found it ghoulishly amusing that one mfg. boasted that its model’s water filter “removed the 5 most prevalent pharmaceuticals” (Prozac being #1).

  13. Petunia says:

    The HNA acquisitions all look like the Japanese spending spree of the 80’s. The top dollar purchase of 245 Park Ave reeks a little of the old Rockerfeller Center deal by the Japanese. 245 Park Ave is the old Bear Stearns building. BS could have bought it, especially since its landlord Olympia & York went bankrupt in the 90’s, but instead they built themselves another headquarters at 383 Madison for $1B and moved out.

    The HNA deal was good for the NY Teachers Retirement Fund who owned a big piece of 245 Park, so I’m glad they were able to cash out with a good profit.

    The other HNA deal that gets a lot of attention in NY is the purchase of Skybridge Capital owned by Anthony Scaramucci. I don’t think that deal has closed yet. Let’s see where that goes.

  14. alex in san jose says:

    Banning foreign ownership of RE would be a huge shot in the arm for the US economy. There would be a dip at first, as foreigners are compelled to sell, but it would be a huge help as there are a lot of young people just itching to start a business right now. And I mean manufacturing, from bicycle trailers to shoes to messenger bags. And myself too, I’d love to be able to buy a building to work out of, and my boss would love to buy a place too, in fact I’ve told him that if he buys a place that’s a bit big, I’ll pay him rent for part of it.

    This is the kind of thing Trump has people thinking he’ll do, but being a frontman for the bankers, I doubt there’s any chance he will.

  15. GSH says:

    It is not truly foreign money that is bidding up the US assets. These are simply the dollars we printed to buy stuff from China now returning home. These dollars as they arrive back home are causing asset inflation as printing always does.

  16. Wilbur58 says:


    Has there been any recent reporting on the FBI investigations into foreign all-cash buyers who purchase real estate through corps and llc’s? I believe they were monitoring NY, Miami, LA, and SF. And if memory serves, they had certain thresholds above which they’d investigate. For example, in LA, I believe they looked into purchases over $2m.

    I think the most famous instance involved the great Ricardo Montalban’s estate. Didn’t it turn out that the purchase of his $44m estate was made by a Malaysian mafia or something?

    (And yes, I said the “great” Ricardo Montalban because um, Khan will always kick ass.)

    • Wolf Richter says:

      Wilbur, I think you posted this accidentally under the wrong article. It should have gone under the prior ‘Whiff of Reality” article. I answered some of your question in this comment, including a link to some details:

      The current efforts are focused on finding out what’s happening – and to scare people into not doing it. This wasn’t a dragnet by prosecutors.

      Also, it’s set to expire soon. So lets see if our real-estate focused administration will move forward with it or let it die. My guess is the latter.

      • Wilbur58 says:

        Thanks, Wolf.

        I actually put it here intentionally because of all the talk of China. I understand the article is commercial and I was referencing residential. But as the comments reflect, it seems like one and the same with China. If China pulls back, I think it would hit all of real estate very hard, echoing TJ’s sentiment above.

  17. MC says:

    China situation is like a bunch of guys building up the dam against rising water level feverently hoping the tide recedes before they run out of bricks.

    If and when China goes bust, it will be both spectacular and tragic at the same time because it will drag the rest of the world down with it.

    On the one hand, the slow train wreck is fascinating to watch, on the other, I really don’t want to be around when that bubble bursts.

  18. R Davis says:

    “Morgan Stanley estimates that China overseas direct property investment could plunge by 84% in 2017 “….
    But, but, but …
    China property invests in Australia …. because …. Australia allows them to bring in their building materials & even some of their workers & most certainly their bosses.
    Australia sell the raw materials to China & China brings back to Australia ‘cheap & nasty’ value added building materials.
    So we love China because they give us jobs.
    Albeit – PM Keating gave millions of Australian manufacturing jobs to China ( FOR FREE ).

    But what you are telling us is that the Australian building industry will experience a lull – a massive bout of unemployment in the Australian building industry.

  19. Thunderstruck says:

    I am surprised that no one here has jumped on this tiny detail:

    “was able to sell $1 billion of dollar bonds last week,”

    So, to finance a spending spree in another country, the purchaser is floating bonds in that country’s currency instead of in their native country currency (Renminbi/Yuan)? That in itself speaks volumes, but poses other questions.
    1. – Was this done because they expect greater stability of the $US (vice expected devaluation of the C-Yuan)?
    2. – Are any of the selling entities buying into the bond offerings?

Comments are closed.