It’s a $20 trillion question…

Because that’s how much commercial real estate is worth in the United States.

And for the past year or so, one expert after another is saying it’s done for.

The pandemic changed how and from where people work as well as where they shop.

Office occupancies dropped because of the work-from-home revolution, and people seemingly prefer to shop online instead of spending hours at their nearest brick-and-mortar mall.

Then, the Fed began raising interest rates, which spelled further trouble for the highly leveraged commercial real estate sector.

So is it doomed?

I don’t think so.

My knowledge of the 18.6-year real estate cycle and common sense tell me that the issue is overblown. Here’s why…

Interest Rates Didn’t Kill Property Values in the Past

As I describe it in my book The Secret Life of Real Estate and Banking, the Fed raised interest rates 11 times since 1955.

Ten out of 11 times, real estate prices went up.

So statistically speaking, it’s way more likely that real estate prices will rise again this time.

And the 18.6-year real estate cycle suggests that at this time, we will not see a 2008-style crash and financial contagion. We’re still several years away from that.

For a quick example, consider the fact that shares of Digital Realty Trust, which owns carrier-neutral data centers, have soared 31% over the past 12 months.

Does it count as commercial real estate? Yes, it does. And it has been performing just fine.

But you don’t see stories like this in the media. The media wants you to think that every single office building in the United States may be worth nothing.

It’s just not true. It’s a dramatic exaggeration.

Second, there’s always a possibility that empty office buildings could get converted into residential real estate.

In fact, it’s already started happening.

In Alexandria, a 1980s government office complex was turned into luxury apartments. Looking at the cubicles on the left, it’s difficult to imagine that it’s the same space. But it is.


Source: Washingtonian

From Washingtonian:

Landlords, developers, and government officials are trying hard to make [conversions] happen. Nearly 4 million square feet of outdated office space in downtown DC is already being converted or is under evaluation for potential transformation, and the District has been soliciting input from builders on ways it can incentivize more such projects. Suburbs such as Alexandria and Reston are also increasingly catching the attention of developers interested in capitalizing on the potentially lucrative convergence of bargain-priced office buildings and the enormous regional demand for more housing.

This is how the future looks. The market always finds a way to turn a profit, and it will do so again.

If luxury apartments can fetch a higher return than office space leases, the problem will solve itself.

My point is simple. The sky is not falling – don’t become prey to that narrative. Neither in this nor in any other case.

Follow the 18.6-year real estate cycle and look for opportunities where no one else does.



Phil Anderson

Editor, Cycles Trading with Phil Anderson

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