Saturated Real Estate Market Being Flooded

NNN Lease Market


The 2001 recession was relatively mild in comparison to past recessions and depressions
that the United States economy experienced. The main factors that contributed to this
short downturn, were the tech bubble burst, the terrorist attacks on the World Trade Center
and a series of very much publicized accounting scandals, such as that of Enron. The real
estate market was only slightly affected by this recession. Cap rates increased slightly while
many investors shied away from the volatile stock markets and decided to put more money
into real estate and especially the attractively liquid REIT market which proved to be a
quick and easy way to hedge risk.
Despite the NBER officially declaring June 2009 as the end of the 2007 recession, the data
shows that GDP has not reached average quarterly growth level of 3.28%
until the first quarter of 2010 and even showed a declining trend starting after the first half of 2010.
In comparison, the year over year growth did not reach the median until mid-2010.


Researchers agree that the recent recession was caused by "the collapse of the housing market
and the resulting sub-prime mortgage crisis that led to bank failures in the US and Europe."
Businesses had a difficult time obtaining credit for real estate acquisitions, refinancing, or new
developments. Record high oil prices are also quoted as a reason for the worldwide economic
downturn. The impact of this international recession could be seen in the stock, as well as the
real estate markets.


 As the liquidity crisis forced many businesses to sell part of their real estate
portfolios, the situation worsened due to the already saturated real estate market being flooded
with many more properties that had to be foreclosed or sold at sometimes half their prior values.

The commercial real estate market, as well as most other financial sectors, has been vastly

affected by the 2007 recession. Even though the recession was officially declared to be over, cap

rates and other economic measurements did not recover until many months after June 2009.

Demand for commercial real estate and GDP growth over the past decade have not been highly

correlated. Despite a relatively stable growth in the United States’ gross domestic product,

commercial real estate transaction volume skyrocketed until mid-2007 and then began to steeply

decline, indicating that investors put too much trust in the unsustainably increasing prices of real

estate. 

A valuable lesson than can be learned from this, is for investors to have a realistic outlook

on the future of their investments. Real estate is not, as it is commonly thought of, a “safe bet”.

However, it is one of the most stable and profitable investments one can make relative to S&P

500 stocks, which lost over 56% of their value in the 2007 market crash and only recovered 63%

of that loss over a course of almost three years.

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