Commercial Real Estate

Of late there have been some main street media news articles about commercial real estate (CRE). The economics blogs have been active describing the ongoing debacle for quite a while. Here's another little heads-up about the CRE market:

NEW YORK CITY-Prices nationwide have fallen 42.9% from their October 2007 peak, according to the latest Moody’s/REAL Commercial Property Price Index report issued Thursday, while Real Capital Analytics says total transaction volume for 2009 will be the lowest of the decade. The November Moody’s/REAL report, which covers transactions through Sept. 30, notes that monthly price declines appear to be leveling off, although September’s index represented a 3.9% value decline compared to August.

According to the CPPI report, which is prepared for Moody’s by Real Estate Analytics using RCA data, the four months between June and September saw prices fall by an average 3.2%. That compares with a 4.6% decline in values for the previous four-month period.

"Further price declines are almost certain over the short term," says Nick Levidy, Moody’s managing director, in a statement. "However, it is notable that the pace of deterioration appears to be moderating."

Similarly, the report points out that transaction volume has been hovering "just below 400" per month throughout ’09, compared to a monthly average of 1,000 sales last year. In September, the number of deals dipped slightly to 363 while the dollar volume rose slightly to $5.1 billion.

"The relatively tight range of transaction volume we’ve seen over the past year may mean that we have reached our bottom in terms of sales per month," Levidy writes in the new report. "However, we may see the market bouncing around this bottom for some time before a significant uptick in overall volume is recorded."

Included in the Moody’s/REAL report is the quarterly National Property Type Indices, which noted an improvement in the third quarter compared to the second for all sectors except office. The 12.2% drop in values for office in Q3 puts the peak-to-trough decline for the sector at 36.2%. In the report’s Top Ten MSAs indices, office prices dropped 19.3%, making office the only sector to experience larger value declines in the top 10 markets than nationally.

Apartment prices, which declined 10.9% in Q3, dropped off less than they had in the previous two quarters. The peak-to-trough decline for apartments is 39.5%. Industrial’s 8.1% decline was considerably less than the record-setting 20.4% drop the sector experienced in Q2, while retail property values showed a minor 2.5% gain after seven consecutive quarters of flat or negative price growth, the report states.

RCA said Friday that total transaction volume this year for the four major sectors and hotels will total just $49 billion, less than half of the 2008 tally and below even the $80 billion recorded in 2001. "While astonishingly low and an excellent illustration of the vast frustration over the still-stagnant credit markets and the interrelated murkiness of the outlook for operating fundamentals and asset pricing for performing and troubled properties alike, the 2009 total represents a modestly improving investment picture," according to RCA’s latest issue of US Capital Trends.

Across most sectors, asset sales "have moved unequivocally off of their lows from earlier in the year," according to RCA. "Throughout the fall, sales have been gaining ground month-to-month, as investors gain confidence on pricing for select assets, and some sellers--and lenders--seek to cut their losses.