Commercial Real Estate Resumes Its Descent

Last month commercial real estate prices took a bit of a breather, falling just 1% after seeing prices fall 9% from March to April and an additional 8% from April to May. Those are fairly stunning rates of decline. In July, the descent picked up steam again, falling 5.1% compared to June.

Commercial real estate prices…renewed steep declines and low transaction volume in July… The [Moody's/REAL Commercial Property Price Index] 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.”

So much for improving second derivatives, at least on the CRE side.

For residential, you can see the market appears to have stabilized this summer. But that’s thanks to government support. Eventually support will go away and residential prices will likely turn back down.

As always, I want to include a caveat with the chart above. Comparing these two indices is difficult due to the number of data points available. The Case-Shiller index draws on millions of transactions over time. The Moody’s/REAL index has far fewer, just 300 this month.

So it’s tough to say anything definitive about commercial real estate prices using this index.

But the lack of transactions suggests sellers don’t want to hit the bid in the market. Though Felix makes a good point–he’s sitting next to me–that many sellers probably couldn’t hit bids if they wanted to. For particularly overlevered properties, selling at today’s prices implies wiping out equity and forcing a big haircut onto debtholders. It’s not easy getting all interested parties to agree on a short sale…

Comments

[Roger Knights:]

"Eventually support will go away and residential prices will likely turn back down."

Along with everything else in this ski-jump "recovery."

Sep 21 01:32 PM

[The Geoffster:]

"It’s not easy getting all interested parties to agree on a short sale…"
Shall I finish the thought?

Sep 21 01:35 PM

[Donald Ingram:]

The commercial real estate debacle has just started to gain momentum, with the worst yet to come down the pipeline during the next five years. Just as the residential real estate market gets hit with the next wave of mortgage defaults and foreclosures due to the Alt-As resetting, which have already begun. Lots more debt to be wrung out of the system yet before we see any sustained recovery in real estate.

Sep 21 04:48 PM

[Jason Tillberg:]

So when will it be time to buy SRS?

It's amazing that prices of commercial real estate fall so much, and yet the appraiser, the stock market, continues to raise the market value of the asset. A market correction needs to be in order and I'm confident it will be.

Sep 21 06:39 PM

[damienhaas:]

If the commercial real estate price is falling, it is indicating that the small and medium size business are not recovering as rental of space remain weak as consumer reduce their spending. Commercial real estate price and demand are a more accurate indicator of the state of the economy when consumption make up so much of our economy.

Sep 21 07:21 PM

[Mad Hedge F...:]

yec The vultures are circling the embattled commercial real estate industry, ready to swoop down and devour the carrion before it’s dead. A trio of REIT IPO’s have hit the market this week looking to buy real estate for pennies on the dollar, as well as the bargain basement debt of other troubled REIT’s. JP Morgan, Citibank and Barclay’s launched their Apollo vehicle (ARI). Bank of America and Morgan Stanley came out with a new security called Foursquare (FSQU). Not to be outdone, Bank of America, Merrill Lynch, Goldman Sachs, and UBS followed up with their Colony (CLNY) instrument. This is a classic example of new equity coming in and taking ownership of assets where the previous owners have gone to money Heaven. Commercial real estate lending exploded from $1 trillion in 1988 to $3.5 trillion in 2007, and some $2 trillion of that has to be refinanced this year. Takers are few, with banks reeling in leverage ratios, insurance companies gun shy, and the collaterized debt markets in intensive care. The TALF is expiring at year end. Did I hear someone shout “Bail Out?” Many listed REIT’s will only survive because their rules limited them to mere 2:1 leverage, and were able to raise $16 billion in new equity since March. That has helped propel the Dow Jones REIT Index ($DJR) up 84% from the lows. More highly leveraged private investors and regional and community banks not so constrained are choking on their holdings, and many are limping on by letting mark to market rules fall by the wayside. This is why I am not recommending bank stocks or REIT’s at these levels. The new vulture issues may be another story. I was involved in a strategy at Morgan Stanley to Hoover up Houston office buildings on the cheap in the wake of the early eighties oil bust. The lucky investors got a tenfold return on their capital.

Sep 21 11:37 PM

[Bill S. Friend:]

These charts affirm the descent continues in all areas of real estate. I have no pity for the banks. They created it. I just wish the government would quit hitting the "hold" button by handing out money. These banks need to square up with reality. The descent continues, the landing gear isnt even down yet, prepare for impact.

Sep 23 10:39 PM

[Between The...:]

With the huge inventory of CRE that will sit idle for years if not decades, now would be the time for the debtholders to agree to a short sale and get what they can now. Refusing to realize the loss does not make it go away, and in some ways the recent improvements in the stock and debt markets offer a chance to get some reasonable losses given the putative nightmare soon to occur. Anyone not taking a market offer on their property now is basically just praying for another bailout.

Sep 25 05:14 PM