As an economist, I get concerned when my development clients see no end in sight to the current real estate boom. And I become apoplectic when my banking and lending clients express no fear that the current real estate market might top out, or heaven forbid, decline. It is these types of perceptions that support the current speculative boom in commercial real estate a boom that is ultimately unsustainable. The classic signs of real estate overbuilding are well known.
Lenders competing for projects offer low interest rate loans to financially weak borrowers.
So long as real estate markets are expanding, the loans are supported. But when things turn down and new tenants are difficult to capture, those same loans turn sour. Already there are clear signs that the hotel and apartment markets are overbuilt. Occupancy rates are declining at the same time that more new product is coming on line. And as long as lenders will lend for new projects, these markets will get a lot worse before they get better.