Elon Musk caused a stir last week when he tweeted "Commercial real estate is melting down fast." In a world that increasingly makes judgments based on short, out of context quotes from influential people, Mr. Musk's statement drew a lot of notice. I thought Jussi Askola did a great job of adding context to Mr. Musk's tweet in his Seeking Alpha article. While it's clear that the office sector has a tough few years ahead of it, the rest of the commercial sectors are doing fairly well. This is a great example of how the misleading statements of an influential investor can quickly lead to a lot of confusion.
He is warning us about office buildings, not commercial real estate, and here's why this matters for REIT investors:
The office sector is tiny, making up only about 5% of the REIT market.
So yes, I agree with Mr. Musk that office REITs are in for some pain in the coming years. The headwinds are real, and this is why we sold our position in SL Green Realty Corp. (SLG) in the $70s last year. It trades at less than half of that right now.
But just because 5% of REITs are struggling does not have any impact on the other 95%, which invest in much stronger property sectors.
