John B. Levy, president of John B. Levy & Company, spoke with Bloomberg Surveillance to discuss trends in the commercial real estate (CRE) industry, addressing whether or not the economy is in a bubble and the impact of Hurricane Harvey in Houston.
Hosted by Tom Keene and David Gura, Bloomberg Surveillance is a daily radio show covering the latest in finance, economics and investment, featuring the leading voices shaping the conversation around world markets.
Last Wednesday’s interview kicked off with a discussion around the possibility of an economic bubble, and how that might relate to CRE. Levy agreed with the notion that the Fed should continue keeping an eye on CRE values, but that real estate itself is not in a bubble.
“For the last 18 months, the last 6 quarters, commercial real estate sales are down. For the last year, they’re down some 28%. So this doesn’t feel like a bubble to us,” said Levy.
According to Levy, a supporting factor is that “people are beginning to look at things in a rather rational way in securitized debt, with commercial mortgage backed securities.”
“And we now have this thing called risk retention, so all of a sudden when you make a loan you actually have to be responsible for the loan,” explained Levy.
Keene and Levy also discussed the differences between the classes of commercial real estate and how they have been evolving over time.
“You want to be in class A, because it’s almost impossible to build class B or class C. There’s no such thing,” said Levy. “Class B and class C are older class A.”
Levy offered the city of Houston, recently impacted by Hurricane Harvey, as a good example of the current dynamic around real estate classes.
He said that “in apartments, which had been hot, Houston is one of the worst markets.”
“Vacancies for apartments are above 10%, and the better 4 and 5 star properties, vacancies are above 11%,” Levy said, comparing it to the national average for vacancies of about 5%.
“So everybody is building better quality product, and now what we’ve had is rents that didn’t keep up with the cost, and in Houston, they had the energy decline even before the Harvey decline.
Levy and the Bloomberg Surveillance hosts also discussed the overbuilding of hotel and office space in New York City, which is reportedly driving heavy discounting in commercial real estate prices and ultimately impacting debt ratings.
“If you look at the Moody’s grading for various cities and hotels, New York’s at the lowest. New York is red,” said Levy. “Some 6 plus percent of the hotel stock is presently under construction, and that’s triple what you might normally see.”
Levy explained that Houston has been in a similar situation, but that the aftermath of Hurricane Harvey might actually change that.
“Houston’s red in hotels is going to go to green very quickly, and apartment vacancies are going to disappear,” said Levy. “So somebody’s pain is somebody else’s gain.”
The segment closed with a recap of the market in the Washington D.C. metropolitan area, which Levy described as a “tale of two cities.”
“Downtown D.C. still does pretty well,” Levy said. “But people are very nervous about signing long term leases, and this is especially true out on the Dulles corridor.”
Levy suggested that uncertainty in the federal government is contributing to the tepid D.C. commercial real estate market.
“D.C. has actually been fairly flat because nobody seems to know whether the government is going to go to another point where they just decide they don’t want to play anymore,” concluded Levy.
To listen to the full segment of Levy’s appearance on Bloomberg Surveillance, visit blevyco.com/category/audio/.