Even so, commercial real estate is not the most dangerous looking sector of the economy and seems nowhere near where it was in, say, 1989. And, as a stock investment, REITs have been winners this year, The Chicago Tribune reported.
Office buildings, hotels and malls are classic boom-and-bust businesses. When monetary authorities open the spigots, as they did in the 1980s and '90s, the money often goes straight into commercial buildings, and a commercial property slump and banking crisis are often hallmarks of a recession.
The commercial-property crash of the late 1980s and early '90s helped to cause the savings-and-loan crisis and prompted a banking consolidation.
But since the last disaster there have been numerous other hot investments to soak up liquidity. First Internet stocks, telecom stocks and stocks generally, then commodities and residential real estate, and, through the whole thing, bonds.
That's one reason the 2001 recession was so mild. Without a real estate bust, the banking sector stayed amazingly healthy and there was never a credit drought of the kind that aggravates many recessions.
For the first five months of 2005 $32 billion worth of U.S. office buildings worth at least $5 million apiece were sold, according to Real Capital. That's up more than 40 percent from the same period last year.
The National Association of Realtors projects that U.S. office space will grow by 56 million square feet by the end of 2006, nearly 2 percent. It shows office rents growing by more than 4 percent annually, but vacancy rates of around 15 percent in many markets raise questions about whether that is realistic.
But this isn't the time to panic about commercial real estate. The national economy doesn't seem in danger of falling into recession anytime soon, the Federal Reserve's unrelenting increases in short-term interest rates notwithstanding. Even if it does, the banking sector still seems relatively unexposed to any exuberance in commercial real estate.
As in the 1990s tech-company bubble, much of the action in commercial property is being driven by Wall Street. To be sure, REITs, brokers and even the bond market could be roiled by a commercial real estate shakeout.
But that wouldn't be as bad as a banking crisis. And to the extent that they are involved in offices and retail, banks seem to be playing much more conservatively.
