I represent Asian investors for US real estate. My people in Asia report that the real investors, not the pure flight money people, now believe that US real estate has become over priced and is set to decline over the next two years. They are becoming net sellers as they want to cash out and have cash in the bank to take advantage of what they believe is the coming downturn. While there is still a flood of flight capital, the commentary above refers to the real investors who invest and not just park money away from the home country. What we do find in Asia is investors interested in our brown field development program due to its longer term play and because we can usually buy assets or land at a discount due to the environmental challenges.

This view is consistent with a growing chorus of US based investors who now believe 2015 may have been the peak and it is downhill from here. Nobody predicts any sort of crash at all, but just an end to party and time to take cash off the table before it begins to decline. If you acquired assets over the past five years, get out now, and smile at the nice gains you have made. Then just be patient.

CMBS spreads are wider, issuance is far less than the heyday, and banks are under pressure from the regulators to reduce LTV. It is becoming harder to max out the leverage and more equity is required. Tie this to a slowing economy again, all sorts of increasing troubles around the world, and another year of Obama, and a growing terror risk, and there is no reason to believe CRE values will be increasing over this year. While many say fundamentals are still good, the reality is it now takes more equity, rates are higher, and the economy is slowing, so values have to decrease in that scenario. A buyer of your asset is no longer able to stretch to acquire what you own.

If the Asians really are pulling back as we have been told by them, then the support for the market starts to go away. Were it not for the Chinese, CRE values would never have reached where they are. The funny money deals are ending. The Fed may or may not keep raising rates, but the prospect they could do three more raises by year end is enough to cause investors to adjust their proformas to reflect that possibility. That means lower prices.

The December and Q4 GDP and capital Expenditure numbers are poor for this stage of the cycle. They indicate the economy is slowing again, and Q1 of 2016 is surely not encouraging. The steep downturn in the stock market and junk bond market do not bode well for investor confidence. Add to that the trashing of the current economy you will hear until the election, and the psychology of consumers and boards is not going to be improving.

We have hit the top and it is time to sit on the side. I am certain many will say all is sound and new build is limited so no need to worry. That is what they always say until they realize it is too late.

Instant Insights /

The Coming Asain Pullback

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