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Janet Yellen wonders — are we in a real estate bubble?

Tens years into an expansion something has to give

Jerome Powell (Credit: Office of the Federal Reserve)

Janet Yellen, Jerome Powell, and Tim Sloan have raised concerns about sky-high commercial real estate prices. In an environment where loan defaults remain rare, should we be concerned?

Market overview: Cheap debt has allowed investors to stretch on prices, which has led to cap rate compression. This new reality has pushed investors into less popular sectors of the market, such as resorts, student housing, hospitals, nursing homes, and retirement communities.

Why the market won’t cool down: Historically, banks would tap the brakes on lending, and the market would correct itself. However, the 2008 financial crisis has forced traditional lenders to be more disciplined. This has led to a boom in alternative lenders, who aren’t bound by the same level of oversight.

Upshot: With so much money flowing into the market, Deloitte has predicted that sales volume will jump 13 percent in the next 18 months… Although we aren’t on the precipice of a crisis, it’s worth taking extra caution in this frothy market.

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