Commercial Real Estate Hits 7-Year Low

The U.S. commercial real estate market in June hit its lowest annual price appreciation since May 2001, according to the Standard & Poor's/GRA Commercial Real Estate Indices. The national composite is comprised of 10 underlying indexes, which cover both geographic, and real estate sectors, and tracks price appreciation month-by-month, and year-over-year.

At the end of June, the composite index had an annual price appreciation of 1.5%. This is a far cry from the cycle's peak of 14.7% in August 2006, and the lowest growth rate since the 1.7% rate in May 2001. In May 2008, the index had been up 3.6%. The composite index was flat for the month of June.

In terms of geographic performance, the Pacific West was the only commercial territory declining in June, but is still up 3.3% annually. The composite regional performance was the worst since June 1995, on an annual basis, down 0.7% since June 2007. Not only was it the worst performance for the country's commercial market since June 1995, but in fact, it was the first decline since June 1995, when the index was down 1.4%.

Among sectors, warehouses had the biggest monthly drop, declining 1.4%. Apartments also declined by 1% in June, but remain the largest sector gainer in the past one year amid the home ownership market fiasco, with an annual price appreciation of 3.6%. However, the apartment sector is down from annual appreciation of 7.7% three months previous.

Retail also showed positive growth, but was most notable for being way off its peak. The sector was up 0.6% in the annual period ending June, but that is versus a high of 15.1% one year ago, in the annual period ending June 2007, and is also one of the lowest growth rates since 2001.

Office was the only sector that declined in the most recent annual period, with 0.2% negative growth in the year since June 2007, but still, it actually has had the biggest gains among sectors in the past three months.

While only one region and two of four sectors saw price declines in June, the overall trend in the S&P/GRA indexes is downward movement on an annual basis, according to S&P.

Comments

[Brett Cole:]

Whatever the data says, who cares, I don't trust it . Transactions are down significantly and the CMBS market is like a deer in headlights. Therefore, who the hell knows what these semi-illiquid assets are worth at a time like this...?

2008 Sep 24 09:30 AM

[investor88:]

Brett has hit the nail on the head with a common sense approach. Whatever the data says, we have to cross check with our heads and common sense. The telling sentence is "who the hell knows what these semi-illiquid assets are worth at a time like this?" - quite a wise observation never mind what long term investors tell you. When you think about these observations, you know that the key is managing leverage levels - leveraging up is a good servant but a bad master when it overwhelms you in bad times.

2008 Sep 24 09:59 AM

[Kunst:]

I have negotiated leases on three retail locations in the past few months (Sacramento area), and deals are astounding. I got offered a gross lease (no triple net increase for 5 years) in a renewal situation. I got base rent at not much more than half of two years ago's rate on another location, along with 30% reduced NNN with a small fixed increase for 3 years.

There are lots of vacancies and landlords are desperate to keep spots filled. They know what's coming, and it isn't an improvement in the market. Landlords are routinely reducing rents when leases end, and in many cases mid-lease. That's what's happening in the real world, or at least this part of it.

2008 Sep 26 04:00 AM