Buying Distressed Assets

Moody's Sees Vast Divergence in Distressed vs. Non-Distressed Prices

Posted on Monday, April 4, 2011

Performance of commercial real estate in the United States is bifurcated, according to Moody’s Investors Service, with larger properties in major markets recovering value while distressed properties remain well off the peak.
When looking at the commercial real estate sector as a whole, the New York-based ratings agency says property prices fell 1.2 percent in January.
It’s the second consecutive monthly decline recorded by the agency’s index, but Moody’s says recent depreciation has been “moderate” compared to earlier in the current cycle, with prices currently 4.2 percent above the post-peak low reached in August 2010.
However, a new research section included in the monthly Moody’s/REAL Commercial Property Price Index (CPPI), called “From the Lab,” demonstrates a vast divergence in property values depending on asset quality.
The CPPI pegs prices overall to be down 42.8 percent from their October 2007 peak.
Drilling down further, however, the supplemental analysis shows that prices on a six-city sub-set of non-distressed properties, which have traded for more than $10 million, are down 18.9 percent from October 2007. Prices of distressed properties, on the other hand, have tumbled 53.9 percent since October 2007.
“Choppiness in the CPPI is starting to subside as the bottoming process that started in 4Q 2009 continues,” said Tad Philipp, Moody’s director of commercial real estate research. “However, some choppiness will remain as the share of distressed transactions continues to be elevated.”
Various sub-indices that Moody’s updates on an annual basis are recording ample gains in prices over the last year, for the most part, in areas where values aren’t being pulled down by high levels of distressed trades.
In the East, the apartment, office, and retail property type indices realized gains of greater than 17 percent in the last year.
Two property types in the South saw significant increases over the past four quarters, apartments increasing 53.7 percent and industrial up 39.4 percent.
New York and Washington office prices have rebounded sharply compared to a year ago, with gains of 32.9 percent in New York and 20.7 percent in Washington D.C.
Apartment prices in Florida recorded their first increase since 2005, up 33 percent from a year ago. Moody’s explained that Florida apartment prices peaked in 2005, two years earlier than prices in most other sectors, in large part because of a market appetite for condo conversion candidates.
By: Carrie Bay, DS NEWS

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