Commercial Property Goes South

The Moodys/Real National All Property Index dropped 0.6% in February compared to January of this year. In addition, the index is about 21% lower than a year ago, and about 18% lower than two years ago.

This index tracks the change in sale prices for different property types based on sales of the same assets over time. The index is a good measure of where commercial property prices are going. The largest year over year price drop (February 2009 vs. February 2008) was reported in industrial, 13.9% decrease; followed by apartments, 13.6% decrease; office, 13.5% decrease; and retail, 8.5% decrease. Also, according to the report, sales volumes in February were down 67% from the year ago period and most of the sales(90%) were for assets under $15 million.

Some conclusions that can be inferred from this data:

• Commercial property prices continue to fall, which could put many owners who bought at the height of the boom underwater on their mortgages.
• There will be a continued rise in loan defaults -- owners who have lostequity are more likely to walk away from their properties or sell at heavily discounted prices.
• Lower dollar deals are getting done vs. large transactions; financingfor smaller properties is easier, which should make price drops in this class >$15 million, less severe.
• With financing still scarce and fundamentals going south, expect pricesto continue falling. Expect fewer transactions as owners are reluctant to take losses.
• Wait for more price drops before buying commercial real estate; whenbuying, focus on the larger, higher growth markets. According to the Moody's report, y/y price drops were significantly lower in the top 10 MSAs for all major property types (apartments, industrial, office, and retail).
• We still favor REITs with assets in supply constrained, urban markets,where values and rents will continue to hold up better. A couple of companies we have buys on are Avalon Bay (AVB) for apartments and Regency Centers (REG), a strip mall owner. Despite declining property values across these sectors, both companies are still trading below the value of their assets.

--Greg Sukenik

Comments

[Rob Viglione:]

Commercial real estate has a good deal of devaluation ahead, whether or not current owners acknowledge it. Just because they refuse to sell at market prices does not mean their properties have not declined in value.

Deals will be had with patience. Power is definitely back in the buyers' court here.

Something investors might want to consider is delving back into the single-family residential range. Yields are becoming more attractive and risk can be diversified through multiple acquisitions in diverse markets.

Apr 28 11:45 AM

[Buckoux:]

" Yields are becoming more attractive and risk can be diversified through multiple acquisitions in diverse markets."

The above reads like the boilerplate hustle of an investment prospectus. The inconvenient truth is that residential housing for investment won't become "investment grade" until the Fed pegs the interest rate to at least 3% and stays there. As long as the Feds cheap money policy is still in effect the low value of the dollar will be reflected in high house prices. Even in this default/foreclosure economy, home prices are unrealistically too high.

Apr 28 01:59 PM