Commercial Real Estate Prices

Commercial Real Estate Prices Fall Again Amid High Volume of Distressed Assets, Although Overall Rec

Posted on Monday, April 4, 2011

Although commercial real estate prices dipped in December and January after three straight months of gains, they are up 4.2 percent from an eight-year low in August, and the overall trajectory for a commercial real estate recovery remains positive, according to reports this week in Commercial Real Estate Direct, Bloomberg and elsewhere.

CRE prices are up 4.2 percent from an eight-year low in August, 2010.
Moody’s announced March 22 that its Commercial Property Price Indices (CPPI) — a joint effort with Real Estate Analytics of New York — dipped by 1.2 percent in January, after a 90 basis point decline in December. (Although it uses a different set of parameters for tracking prices, CoStar Group on March 9 reported a 1.1 percent decline in January prices for investment-grade properties in the U.S.)

Moody’s Commercial Real Estate Research Director Tad Philipp said the recent “choppiness” in pricing is a sign that the bottoming process that began in late 2009 is continuing. Similarly, Moody’s Analytic economist Christopher Cornell said, “Most demand drivers for commercial real estate have reached bottom, including office-using employment.”

Although price appreciation will likely remain constrained by excess supply and the number of distressed assets on the market, Cornell said “the underlying demand for commercial real estate has begun its turnaround.” Distressed assets accounted for 26 percent of all sales in the January CPPI.

At the RealShare Real Estate 2011 Conference in California last week, one of several experts on distressed properties said that “wholesalers,” who currently hold the bulk of distressed assets, “are starting to reposition, foreclose or even sell the notes on distressed assets.”

Of the estimated 7,000 commercial mortgage-backed securities (CMBS) loans that were in special servicing (as of Dec. 31, 2010) due to actual or imminent defaults and other factors, only 354 were reportedly restructured or modified (vs. liquidated). Under questioning by panel moderator Jess Bressi (Luce Forward), panelists said domestic banks last year foreclosed roughly 71% of the time; in only about 29% of cases did they restructure/modify loans by changing loan terms, recapitalizing or via other means.

The Roundtable's Q1 2011 Sentiment Survey reflects the "bifurcation" in commercial real estate markets.
Asked about factors driving or inhibiting availability of distressed investment opportunities, one panelist, according to (March 15), said, “Unemployment will continue to slow the absorption of anything but superior properties in high-demand markets.”

This “bifurcation” in commercial real estate markets — between the urban gateway cities that are recovering much faster than mainstream markets — and concern about weak private-sector job creation are in line with recent findings of The Real Estate Roundtable’s quarterly “sentiment surveys.”

With the release of the Q1 2011 Sentiment Survey in late January, Roundtable Chairman Daniel M. Neidich (Dune Real Estate Partners) said “Legitimate headwinds remain, such as an unacceptable unemployment level, a huge pipeline of maturing commercial mortgages and large fiscal issues at the state and local levels of government. . . Some industry sectors are on the mend, but until private sector job creation picks up, we are certainly not out of the economic danger zone.”

The Q2 2011 survey will be launched in coming weeks — with data collection continuing through the Spring 2010 Roundtable Meeting on April 12 — to assess how senior commercial real estate executives view conditions in commercial real estate overall, along with property values and access to credit and capital. Roundtable members will also have an opportunity to share insights on these issues with Fed Chairman Ben Bernanke at the upcoming meeting, where he will be among our senior U.S. policymaker guests.

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