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Commercial real estate – what went wrong?

Until they weren’t: “But then mid-year, in response to three different things, the markets started to cool significantly such that by the end of the year, sales and originations were down well more than half from a year earlier – and that continued into this year,” he said.

The three-pillar approach is then taken to determine what’s happened, he suggested. “What we’re seeing right now is that it’s a confluence of three separate markets – there’s the space market – supply and demand of office space, apartment space, retail space, industrial space and that drives rents, vacancies, properties and things like that.”

The next rung: “There’s the equity market and how investors are putting their money to work in commercial real estate, and that’s driven by the return they can get on other investments,” Woodwell noted. “That’s driven by whether they’re in a risk-on or risk-off mode and that then turns and hits rates and property values and sales activity.”

And the third pillar: “And then because commercial real estate is so capital-intensive, there’s the debt market, and then there’s the cost of debt, where interest rates are, the availability of debt, the demand for debt – all those kinds of things. Sometimes, something will happen in one of those three markets – the space market, the equity market, the debt market – that will sort of throw off commercial real estate players a little bit. What we’ve seen over the last year is really some pretty significant changes in all three of those markets.”

As a result, what we now have is a bottleneck: “The changes and some of the uncertainty there has led to this logjam in terms of transaction activity,” Woodwell said.

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