Looking a gift horse in the mouth, so the adage goes, is an impolite act that any prudent recipient should avoid.
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Looking a gift horse in the mouth, so the adage goes, is an impolite act that any prudent recipient should avoid.
But when that gift is in the form of rising residential and commercial real estate valuations, the president of the Federal Reserve Bank of Boston says it's not a bad idea to check its teeth, legs, hooves — the whole beast.
Higher property values, particularly in Hartford, which saw its overall 2016 grand-list climb 10 percent, make it more likely for homeowners and commercial landlords, especially apartment owners, to borrow against their properties for repairs and upgrades. They also provide collateral for other realty purchases.
Boston Fed Chief Eric Rosengren, speaking recently at a real estate risk management conference at New York University, sounded a tone of caution about the potential for economic conditions that cause rising realty values to reverse course. Collapsed residential and commercial real estate values were at the root of the 2008 global financial crisis that triggered the two-year Great Recession.
“For almost any asset category, positive trends can sometimes evolve into prices that increase more than fundamentals justify,” he said. “It is very hard to distinguish how much of the price gain is the result of the favorable fundamentals, and how much reflects an abundance of optimism by investors.”
As a result of Hartford's Oct. 2016 revaluation, commercial property values in the city rose 20 percent from 2011.
Many Class A office towers downtown, along with the corporate headquarters of the city's largest employers, saw their property values skyrocket by 50 percent or more.
The 296,000-square-foot Metro Center at 350 Church St., for example, saw its market value double to $24.5 million last October from $12.8 million in 2011.
Investment by the Capital Region Development Authority to help landlords convert former vacant office towers into apartments has been a key reason commercial property values have grown.
That, along with the state's purchase of the former Connecticut River Plaza office tower and more businesses coming downtown, has eliminated significant empty office space, boosting Hartford's commercial real estate values.
Rosengren said he and other financial regulators must be especially watchful of developments in the realty sector, which has benefitted from favorable “tailwinds'' such as low, stable inflation and monetary policy, including prolonged low interest rates.
Connecticut and New England, some observers note, were spared the harsh real estate headwinds of a decade ago because valuations in the region didn't soar like much of the nation's.
“While I do not expect that a downturn in commercial real estate prices would by itself cause a significant problem for the economy,'' Rosengren said, “in some past recessions such an occurrence has propagated an initial adverse shock — and by constraining financial intermediaries, made the extent of the subsequent economic downturn more severe for a wide range of households and businesses that depend on intermediaries for credit.''
– Gregory Seay
