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The case of the missing commercial real estate cycle

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  • Haibin Zhu

Abstract

Booms and busts in commercial real estate have been a traditional source of distress for financial institutions.2 In the early 1990s, for example, the downward correction of commercial property prices caused a significant increase in bad debt expenses for banks and other financial institutions, and turned out to be a major contributor to the global economic downturn. In contrast, the commercial property cycle was much less pronounced in the recent global business cycle. While housing prices have risen markedly in a number of countries in the past five years, with few exceptions commercial property prices have remained well below the level reached a decade ago. This “missing” commercial real estate cycle is arguably partly attributable to the rapid growth of real estate securitisation in the past decade. First, the emergence of new financing methods provided a substitute for traditional banking finance and may have helped even out the flow of capital into the commercial property sector. Second, the development of public markets improved information transparency and may have strengthened market discipline. And finally, the development of public real estate equity and debt markets made it possible for commercial property risk to be spread through capital markets to a wider array of investors. Nevertheless, these structural changes by no means imply that commercial real estate cycles have disappeared. To a significant extent, the absence of a commercial property boom in the late 1990s could be a consequence of the slow pace of absorption of the overcapacity generated during the late 1980s boom. Furthermore, the closer integration of commercial real estate markets with capital markets does not suggest that the commercial property sector will now be immune to all shocks. In fact, commercial property markets might even be subject to new sources of market volatility.

Suggested Citation

  • Haibin Zhu, 2002. "The case of the missing commercial real estate cycle," BIS Quarterly Review, Bank for International Settlements, September.
  • Handle: RePEc:bis:bisqtr:0209g
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    1. Mr. Paul Louis Ceriel Hilbers & Ms. Lisbeth S Zacho & Mr. Qin Lei, 2001. "Real Estate Market Developments and Financal Sector Soundness," IMF Working Papers 2001/129, International Monetary Fund.
    2. Orazio Mastroeni, 2001. "Pfandbrief-style products in Europe," BIS Papers chapters, in: Bank for International Settlements (ed.), The changing shape of fixed income markets: a collection of studies by central bank economists, volume 5, pages 44-66, Bank for International Settlements.
    3. Claudio E. V. Borio, 1995. "The structure of credit to the non-goverment sector and the transmission mechanism of monetary policy: a cross-country comparison," BIS Working Papers 24, Bank for International Settlements.
    4. William C. Wheaton, 1999. "Real Estate “Cycles”: Some Fundamentals," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 209-230, June.
    5. Gregory D Sutton, 2002. "Explaining changes in house prices," BIS Quarterly Review, Bank for International Settlements, September.
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