Today, Moody’s Investors Services posted its most recent Moody’s/REAL Commercial Property Price Index. The results show continued price declines in US commercial real estate across the board. According to the report, CRE values are now 30.8% below those of 1 year ago and 38.7% below peak levels of October 2007. I found this article published today on Todd Phillips’ blog Commercial Real Estate Investment in which Todd makes several great points about the state of CRE values. Here are some key excerpts from his post (emphasis mine):
A major topic of discussion at the conference was the fact that there is no market-clearing mechanism (e.g. creation of the RTC after the S&L crisis) as a tool to quickly ‘clear the bench’ and get back to normalized deals. Consensus is that we have to clear the market ourselves and that it will take some time (up to five years) to return to normalization. At the end of the day, the market needs to clear bank inventory of bad debt. It is affecting both the capital markets and leasing markets (given market views that there are large blocks of excess space on the market).
The capital markets will likely recover prior to a rebound in fundamentals. Most investors, however, believe values will drop another 10% before industry can call a bottom. Little to no capital will flow into the market until investors can comfortably call the bottom, even if the bottom turns out to be in the past. A full recovery will be marked by equity players starting to buy vacancy again.
and
In summary, I’d expected capital markets to rebound in 12 months (give or take) and fundamentals to begin to improve after 24 months. Until then, we remain in a period of deteriorating fundamentals.
Assuming we have another 10% decline in values ahead of us will lead to a market bottom seeing value declines of basically 50% from the peak of the market. That is a big decline. The takeaway here is that most believe the market will continue to fall and as a result of this belief, transaction volume will remain stagnant until there is a consensus view the bottom has been reached. Sounds like a circular reference in Microsoft Excel to me. Investors are not going to buy until they are sure we have reached the bottom and we can’t be sure we’ve reached the bottom until investors are buying again.
Here is (what I believe to be) today’s press release for the Moody’s/REAL Commercial Property Price Index (copied from Zero Hedge’s post).
Moody’s: US commercial real estate prices resume steep declines in July
New York, September 21, 2009 — Commercial real estate prices as measured by Moody’s/REAL Commercial Property Price Indices (CPPI) renewed its steep declines and low transaction volume in July, Moody’s Investors Service reports. The CPPI was down 5.1% from June after having declined by only 1% the prior month. It is now 30.8% below what it was a year earlier and 38.7% below the peak measured in October of 2007.
Overall market transaction volume continued the pattern of calendar 2009. “The market has averaged about 375 sales per month for the seven months in 2009,” said Moody’s Managing Director Nick Levidy. “Over the same time period in 2008, sales were averaging nearly 1,100 a month.”
Moody’s Regional Property Type Indices show prices for apartments in the East performing significantly better than in other regions (and also better than other property types in the East). In the East, apartments have declined 6.0% in the past year, and 10.5% in the past two years, which is smaller than the decline of any other regional property type for just one year. Nationally, apartment sector prices have declined 24.4% in the past year.
Southern apartments have posted the steepest drop over the past year, at 44.2%.
Florida apartments have also seen dramatic declines in the past four quarters, declining 39.8%. Florida apartment prices are now 49.8% from their peak prices.
Other notably weak markets the Indices point to are the office and industrial markets in Southern California. In that area, office values have declined 25.8% and industrial values 24.2% since a year ago.
The CPPI
Moody’s/REAL Commercial Property Prices Indices are based on the repeat sales of the same properties across the US at different points in time. Analyzing price changes measured in this way provides maximum transparency and methodological rigor. This approach also circumvents the distortions that can occur with other commercial property value measurements such as appraisals or average prices, says Moody’s.
The report, “Moody’s/REAL Commercial Property Price Indices, September 2008,” is available on the company’s website, www.moodys.com.
1 comment
Praveen Kumar says:
September 24, 2009 at 5:45 am (UTC -8)
I am based in Auckland, New Zealand. Our experience has been that the volume of commercial property sales went down dramatically by around 50% from Jan 2008 to June 2009. However the yields on the property moved up only marginally by 1% in spite of interest rate drop by nearly 4%.