For a year or more now, the reports pertaining to commercial construction have been joyfully positive…especially when viewed in the light of the reports coming out on the residential construction sector.  Last week (September 5th), Bloomberg.com ran a commercial construction ‘update’ titled Commercial Real Estate in U.S. Poised for Price Drop.  Of course, I immediately investigated, and what I found surprised me.

Hui-yong Yu and David M. Levitt postulate that “U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales.”  Their reasoning stems from the estimates of several industry leaders, as well as concrete examples of deals being called off.  “‘There are so many deals falling apart,’ said David Lichtenstein, chief executive officer of Lakewood, New Jersey- based Lightstone Group, and owner of more than 20,000 apartments and 30 million square feet of office and retail space.  ‘People who can get out are getting out.’”  Further evidencing this point of view is the Bloomberg Office Property Index, which fell 2.7 percent.

By far the most important point to realize, however, is that these negative projections are based largely on “fear in the system.”  In other words, “‘You’ve got a lot of fear in the system from the capital markets,’ said Martin Stein”, CEO of the third-largest company by market value in the Bloomberg REIT Shopping Center Index (Regency).  ‘As far as the pricing of credit, it was greed six months ago and it’s fear today.’”

While a thought-provoking and certainly valuable article, I have to disagree with the severity of its conclusions.  While there may be minor price corrections here and there, commercial construction is ages away from the kind of price correcting happening in the homebuilding sector right now.  Click here to find out why.