Can two global commercial real estate markets get along without driving each other crazy?
That’s the question facing Dubai and the U.S. these days — the Oscar Madison and Felix Ungar of the global real estate market.
It’s a good question, considering that Dubai’s state-owned investment arm announced recently that it couldn’t pay off an accumulated $59 billion in commercial real estate loans. The announcement set off a minor panic in the global real estate markets, and the ripple effect was especially felt 6,860 miles away from Dubai in New York, where the Dow Jones U.S. Real Estate Index fell 2.9% on one day alone (Dec. 4).
The drop-off in the index signifies some genuine fears in the domestic commercial real estate market. This at a time when the market is a fragile one, unable to withstand much more damage as it tries to recover from historic losses in property values.
What are some of the primary impactors? Let’s have a look.
The ripple effect. Even though roughly 7,000 miles separates Dubai and Wall Street, the two global finance centers are a lot closer than you think. It’s a global economy now, and plenty of U.S. money is tied up in Dubai. Citigroup (Stock Quote: C), a major lender to U.S. businesses and consumers, has a huge investment in Dubai. Consequently, with its investment in peril, that’s less money for real estate loans back here in the states.Low prices travel at the speed of light. OK, maybe not that fast, but with Dubai having to unload commercial real estate property at fire sale prices to raise cash, that only drives prices down in other key bourses. MGM Mirage (Stock Quote: MGM), for example, is a big partner in Dubai’s $8.5 billion CityCenter project. And Nakheel, another CityCenter developer, owns big real estate properties in New York and Miami. With the project bleeding cash, that triggers a financial virus that forces other investors to sell off properties at lower prices to keep the revenue pipeline flowing — even in places like Las Vegas, New York and Miami Beach.