Across the globe, more forecasts suggest a big drop in real estate values could be on its way. Bayes Business School in London indicated values need to fall between 25% and 30% to match today’s lending realities of tighter underwriting and higher costs. Just such a decline in values has already occurred this year in U.S. real estate investment trust stocks. Alan Todd, commercial mortage-backed securities strategist for Bank of America Securities, says that could very well predict where brick-and-mortar prices are headed.
The Dow Jones Equity REIT Total Return Index has fallen by roughly 25% over the past year. That is an indication of how public market investors are currently pricing real estate, Todd said in a report.
“Because REITs are publicly traded, they tend to reprice more quickly than privately held real estate does due to the slower price discovery and transaction process,” Todd said. “We think that it stands to reason that the private market will ultimately be forced to acquiesce and look for commercial real estate prices to fall 20% to 30% over the next year or so.”
As a result, many borrowers may need to pump in additional cash to successfully refinance their loans in the coming months, Todd added.
Author Credit: Mark Heschmeyer, CoStar