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Bubble, Bubble Maybe No Trouble

Posted by: Chris Palmeri on September 12, 2006

An outfit called Global Real Analytics sent me a study last week that aimed to debunk talk of a bubble in the commercial real estate market. I thought of it again this week because the Wall St. Journal published a page one article on Monday saying that bank regulators were concerned about the sky-high exposure many lenders had to real estate.

The Global report concluced that—after adjusting for inflation— three of four commercial real estate categories showed values below what they were in 1985. Office was down 10%, retail down 5.1% and warehouse, -3.8%. Only apartments have done better, up 43% since the mid-80s. “U.S. commercial real estate is inexpensive by global standards,” the report went on to say. “Is there really a price bubble or is commercial real estate still a bargain? Our answer: Not yet overblown with upside potential…”

Global Real Analytics must have a broker’s license and be badly trying to drum up sales. “This is certainly one of the more idiotic studies I have read,” said one real estate source of mine, who’s been busy selling his buildings at today’s high prices. “The conclusion should not be based on 1985, the height of the bubble, but the mid-90’s, which were a period of stability in many ways. From then to now, inflation adjusted prices in office, for example, increased by 50%.” Indeed, Global’s report shows that office prices have climbed nearly 50% since their bottom in 1993.

As I’ve said in this column before, you can reach all different kinds of conclusions with statistics. To justify values in real estate these days you really have to.

Reader Comments


September 12, 2006 2:54 PM

One of the items that goes under-discussed in this "Is real estate too costly?" issue, is that of replacement costs. I know that here in coastal California, producing new and well constructed housing requires following a rigorous building/safety code and much costly dealing with regulatory agencies. Because of that, the per square foot construction costs are very high. Basically, the only "give" I can see in pricing is in the cost of the land, which at least here, is in very short supply. So if that's true, how are prices going to retreat except for a deflation/devaluation downward spiral?

Matt Carter

September 12, 2006 6:15 PM

Did you see the New York Times Magazine article on Sunday that talks about the weakness in commercial real estate in Lower Manhattan? Bloomberg wants more residential development!

Eliza Maledevic

April 13, 2007 12:50 PM

Investing a home is certainly what each and every one of us even dreams of. Owning a home is actually the most precious asset, but owning one is like a dream coming to an end.

A lot of homeowners now are quit scared of having stall coastal doom. Like, a Yale economist, Robert Shiller, he finds the global housing boom ‘the largest bubble in history’. This issue of housing bubble is really the talk of the town, a lot of articles came out asking if we are in housing bubbles right now.

So now, are you being scared with all of this stuff? Don’t be scared, since there is no housing bubble. This is actually according to some sectors of the real estate market. If we only think about it and make some study, and examine the possible data and situations, then e will come up to knowing that there is no housing bubble.

Eliza Maledevic

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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