The traditional retail model has undergone massive changes in the last few years here in California and across the country. With more people shopping online, shopping malls and other retail stores are helping the commercial real estate market plateau. Developers could find themselves in financial trouble if paying back their loans becomes problematic due to changes in how the economy works.
Banks have provided approximately $4.3 trillion dollars in commercial real estate loans since the last financial crisis, and that number exceeds the amount of loans out there at that time by 11 percent. When coupled with the fact that commercial real estate prices have already peaked and flat lined again, the market appears to be on a downward slope once again. These signs have some sources nervous.
So far, the drops are coming in small percentages, but that may not last. Many commercial real estate sectors are seeing declines, such as lodging, office space and multi-family developments. Retail continues to be hit hard by e-commerce. Only industrial developments such as fulfillment centers and warehouses saw substantial gains, which makes sense considering the new face of retail.
California developers may need to shift their thinking when it comes to the types of projects they take on now. This may mean working with some of the big names in the online shopping industry. Those contracts are more than likely sought after by many at this point. Companies could end up bidding wars in order to receive these development contracts, and having the right legal advice and assistance could help provide a leg up on the competition. It could make the difference in surviving another real estate bubble if it happens.
Source: businessinsider.com, "A bubble in commercial real estate may be about to pop", Wolf Richter, April 16, 2018