"The national office market was down 18.6%" in Q1 2009 compared to Q4 '08, Elkin tells GlobeSt.com. "That was well beyond what you'd expect in one quarter. Maybe we're insulated from that somewhat here in New York, but I personally underestimated how poorly the secondary and tertiary markets are doing, particularly in the office space."
He adds, "Comparing these national and top 10 office returns over the past quarter and the past year, that's shocking. If the top 10 markets are down 6.8% and nationally it's down 18.6%, that means the secondary and tertiary markets are down close to 30%. That's an enormous drop in price over one quarter."
Office, Elkin points out, "was one of the sectors over the past three years where we saw strong performance as investors were searching for deals and going farther and farther afield. That turned very quickly, much faster than we would have thought." Overall, office property prices have declined 30% from their peak in October 2007, according to REAL, which compiles the indices using data from Real Capital Analytics. Regionally, the largest falloff was in the West, where prices sagged by 16%.
Elkins cites some possible explanations for smaller markets' steep drop in office prices. "In secondary and tertiary markets, the creditworthiness of the tenants may not be as strong as that of tenants in the primary markets," he says. "As a result, the owners of those assets, even if they stay true on their maintenance, become vulnerable."
In primary markets, says Elkin, "you've got a deeper tenant pool, higher quality tenants, and there's a bigger lag. Because of that tenant profile, the sales don't occur until the refinancing comes up. While that same scenario would apply in secondary and tertiary markets--that if you manage your monthly costs, you will not sell--one of the things this tells me is that even the monthly maintenance became overwhelming in these markets."
Although REAL steers clear of long-range forecasting, Elkin says that "if we assume that the monthly carry costs in the top 10 MSAs will continue, then the implication is the distressed sales will not occur until the refis begin to pile up. These refis will be building up pressure in 2010 and 2011, not through 2009."
Perhaps surprisingly in view of the challenges retail has faced lately, the overall quarterly drop in this sector was smaller than it was for office: 12.9%. "In addition, we are surprised that our Top 10 MSA Retail index reflected a larger drop than our National Retail index--14.0% vs. 12.9%," Elkin says in a release.
Overall, selling prices for retail properties are off 13% from the October '07 peak, according to REAL. Apartment and industrial prices remained flat during the quarter, although Western apartment prices gained by 2.7%. Elkin says in a release that sales volume for the market overall shows that both total dollar value and number of sales are down about 75% to 80% lower than the volume seen at this time last year. REAL's All Property Type Aggregate Index is measured monthly, while national and regional data by property type are measured quarterly.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
