Commercial Real Estate Prices

Moody's: U.S. Commercial Real Estate Prices Fall to New Cycle Low

Posted on Thursday, October 21, 2010

Hearing declarations that recovery has taken hold in the commercial real estate sector, with property values and fundamentals on the upswing? Hold up – not just yet.

Commercial real estate prices have slipped again and are now the lowest they’ve been since the beginning of the market downturn, according to new data released Tuesday by Moody’s Investors Service.
In August, the Moody’s/REAL Commercial Property Price Indices (CPPI) recorded a 3.3 percent drop, as prices fell below the previous low hit in October 2009. It’s the third consecutive month the price gauge has posted a decline between 3 and 4 percent.
Nationwide, prices are 45.1 percent below their peak of October 2007 and have returned to 2002 levels, Moody’s explained. The CPPI has declined 7.6 percent in the past year.
“The commercial real estate market in the U.S. has become trifurcated with prices rising for performing trophy assets located in major markets, falling sharply for
distressed assets, and remaining essentially flat for smaller healthy properties,” said Nick Levidy, managing director at the New York-based credit ratings agency and research firm.
Slightly over 25 percent of all sales in August were considered distressed, according to Moody’s. This is similar to the yearly average for 2010 where 26 percent of all repeat-sales transactions have been distressed.
Levidy says prior to 2009 there were only a few distressed sales, and the CPPI was driven up by a large number of performing properties. During the course of the downturn, however, the volume of distressed properties has increased, causing an increased weighting of the CPPI towards troubled properties that have had large negative rates of return, Levidy explained.
“This tug-of-war between performing and distressed properties contributes to choppy index results,” Moody’s said in its report.
Moody’s/REAL Commercial Property Indices are based on the repeat sales of the same properties across the U.S. at different points in time. The dollar amount of the repeat sales was slightly higher in August, totaling $1.85 billion, compared to $1.35 billion in July. However, Moody’s says the number of repeat sales remains significantly below what it was during the peak.
Moody’s noted in its report that commercial real estate prices are currently 19 percent below the Consumer Price Index (CPI) since December 2000. Over time the company’s analysts expect the CPPI to revert to a long-term trend line close to that of the CPI.


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