The commercial markets did not participate in the outrageous price increases during the first few years of the current upswing. It wasn’t until about 3 years ago that some of these commercial property investors started catching the fever. These properties are still going up, but in my view they’re even more likely to take a beating than the residential markets.
Commercial properties are all about making money, and nothing but making money. There’s no sentimentality or warm & fuzzies involved. The thing is, if a buyer pays 50% more for a property than their competitor did a couple years ago, that purchase has to financially justify itself. That comes either through increased productivity and profits or through further rent/price increases. No matter what, there are limitations to what a business can pay for real property when they compete with other businesses on a national and global scale. Trees don’t grow to the sky, particularly not money trees.
The rates of return on commercial properties are already at or near the interest rates the mortgage lenders charge. That means those rates of return cannot go any lower. Unless the market rents increase the prices can’t go higher without those buyers working on a negative cash flow.
We’ve seen it already with these downtown condo projects being abandoned because the reality didn’t match the forecasts. It’s just a matter of time before a lot of these other property types follow suit. Don’t forget, the weakest link in the business world is the small business owner, so they’re the ones who will feel an economic downturn before anyone else. Whether they have purchased their property or leased space in someone else’s property, if they get starved out during an economic downturn there won’t be a replacement nearby to cover the vacancy.