Commercial Property Values Declining - MIT, Moody's

Commercial real estate values are finally beginning to decline as a result of the credit crunch, according to two new reports. The MIT Center for Real Estate's quarterly transaction-based index [TBI], which reflects the value of commercial property owned by pension funds, dropped 2.5% in Q3 2007. The decline -- the index's sharpest downturn since Q4 2001 and first drop since Q3 2003 -- could herald the end of the sector's five-year rally. "The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets," said David Geltner, Director of the MIT Center. Meanwhile, a report to be released Monday by Moody's Investors Service shows a 1.2% decline in the value of commercial property in September from August. The two reports suggest that despite the rarity of default in commercial real estate, lenders are reluctant at present to grant credit to any form of real estate. If the value of commercial property slides, the default rate on commercial real estate loans and commercial mortgage-backed securities could rise. The latter has a default rate of 0.4% versus a 20% default rate for subprime loans. Moody's MD Tad Philipp notes that even if the commercial-mortgage default rate triples, it would still not be "alarming." Nonetheless, the change in value direction could "represent the inflection point in commercial real estate values given the ongoing liquidity crunch," according to the Moody's report.

Sources: Press release, Wall Street Journal
Commentary: Commercial Real Estate Heads South • Commercial Real Estate Could Drop 15% -- Bloomberg • Commercial Real Estate: The Next Shoe Drops • Commercial Real Estate Could Be Next Victim of Credit Market Woes
Stocks to watch: ICF, IYR

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