Commercial and residential real estate going in opposite directions?

Commercial real estate seems to be going through significant challenges, due to the impact of internet shopping (aka the “Amazon effect”). As more and more businesses decide to shutter stores or go bankrupt, this puts significant downward pressure on retail commercial real estate space. Given the fact that over 100 million square feet of announced store closures occurred in 2017, and 77 million square feet of closures have occurred so far this year (in less than a third of the year), the outlook does not look bright. Add to that scenario the probability of a recession occurring in the next year or two, and that makes for a less than sunny future for commercial real estate.

Contrast that picture with residential real estate. Even with the headwinds of changes to tax laws that reduced the limit of the mortgage interest deduction, lowered the total deduction for state and local taxes (including property taxes), and increased the number of years property had to be lived in to take the $250,000 (single) or $500,000 (married) personal income tax deduction, residential real estate prices keep going up. Add to that the affordability issue of interest rate increases causing mortgages to become more expensive, and the prospect of additional “normalization” increases of the prime interest rate by the Federal Reserve in the future, and that may have a tendency to cause potential buyers to pump the brakes on their future purchases.

However, with the housing supply at its lowest levels in decades, homebuilders producing new housing at numbers lower than historical averages, and higher demand due to millennials coming into their “first time buyer” age – it all adds up to higher prices. At least, that is the case for residential real estate. And always remember the three rules in real estate: 1) location, 2) location, and 3) location.

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