Commercial real estate boom is evident in recent reports. However, with the increasing commercial property values, businesses suffer due to high rental rates.
In Manhattan, New York, Pearl River Mart may be closing its doors due to an alarming projected $500K monthly rent, reports New York Times. The Chinese mart may be a casualty of the real estate boom, aside from having a growing number of competitors offering products from China.
Ching Yeh Chen, the retailer's president told the New York Times that Pearl River's monthly rent for the 30,000 sq.ft. store is $110K and "was likely to jump" to five times as much. "It's just impossible for us to pay that. Smaller stores like us are just moving out one after another. Instead, you have Bloomingdale's, Muji, CB2," said Chen.
Commercial Real Estate Values 14% Above 2007 Peak
In a report by The Wall Street Journal, real estate research firm Green Street Advisors said that March commercial property values remained since February but 11 percent greater than last year's. The values are also 87 percent more since 2009's low point and more than 14% from 2007's peak, based on the Green Street's index.
Growth is expected with the current low-interest rates and with the "debt capital that is freely available, you have a recipe for further property appreciation." Peter Rothemund, an analyst at Green Street, told WSJ.
The Negative Effect: Very High Commercial Rents
With increasing property values, come increasing property taxes. The landlords just have to transfer its cost to the renters in the form of higher commercial rents.
New York's Pearl River is not alone in this tragic situation. In Boston, a Newbury upscale café is reportedly shutting down after almost three decades in the business due to higher rents that the owner, Debbie Lewis just could not afford, reports Boston Globe.
Prediction: Commercial Real Estate To Grow Through 2017
According to the forecast from the Washington D.C.-based Urban Land Institute, commercial real estate will continue to rise through 2017, reports The Dallas Morning News. "Real estate pros predict three more years of smooth sailing for U.S. real estate," the Urban Land Institute's William Maher informed the outlet.
However, Jorge Newbery, Founder & Chief Executive Officer of the American Homeowner Preservation LLC said in his blog for the Huffington Post that based on Real Capital Analytics forecasts, commercial real estate values could drop from 8 percent to 19 percent if economy improves and the Federal Reserve raises interest rates. It is reportedly based on the assumption that the current 2 percent "rates of 10-year Treasury bond yields would normalize at a healthier-for-all 4 percent."
However, the Federal Reserve might only increase the rates gradually, reports Washington Post. Thus, commercial property real estate escalating values may not yet still be curbed.
We are not actually hoping for real estate values to go down and let many investors suffer great losses. But justified rents for everyone must be met. Commercial real estate investors, developers and landlords need to make a living, but so do renters.
