NEW YORK CITY-Based on a growing share of distressed transactions, commercial property price indexes (CPPI) declined by 4.2% earlier this year, bringing the index to its lowest level since October 2007’s peak, according to a May 2011 report prepared by Moody’s, in conjunction with Real Estate Analytics, LLC and the MIT Center For Real Estate. At the same time, the CRE market is showing some signs of life, as a recent pick-up in the volume of transactions is setting the stage for renewal, the report finds.
“The CPPI continues to bounce along the bottom as a large share of distressed transactions preclude a meaningful recovery of overall market prices at this time,” says Tad Philipp, Moody's director of CRE research, in a statement. The index is now at its lowest point post peak, 47% below its October 2007 peak. “Indeed, the post-peak low in price has been reached in the same period as a post-peak high in distressed transactions has been recorded,” he says.
In March, Moody’s says there were 182 repeat-sales transactions totaling approximately $2.5 billion this year, an increase by both count and balance over February. However, the report notes that nearly one-third of all repeat-sales transactions qualified as distressed. “Given that it may take 12 to 24 months to foreclose on a property and execute an REO sale, there is a lag effect that results in fewer distressed transactions coming to market in the early stages of a downturn and an increased level in later stages, i.e., now,” Philipp says, in a statement.
And as troubled properties work their way through the system, all property types--including apartments, retail, office and industrial--had price declines in the first quarter of this year, the report says. The hardest hit sector were industrial properties, dropping 7.7% in Q1, with office closely following at a 7.1% decline. According to the report, this is the lowest point for the national industrial index since its peak in Q4 of 2010.
The property types that had the smallest declines were retail and apartments. Retail fell 4.5% in Q1, but retail prices as a whole have improved by 9.4% since the post peak low in Q2 of 2010. On the multifamily side, apartments measured a 3.2% increase in prices over the last four quarters.
But major markets like New York, Washington DC, Los Angeles, Chicago and Atlanta are generally stronger. Results from Moody’s “From the Lab” section of the CPPI report suggest a trend of recovering prices for major assets in large markets, even when distressed exchanges are included. Philipp added that these markets outperform the overall CPPI. “This is consistent with liquidity in the commercial real estate sector first returning to prime assets in capital attracting cities,” he says, in a statement.
Spokespersons from Moody’s and REAL did not respond to additional questions about the report in-time for deadline.
Other national studies have yielded different results. Newport Beach, CA-based Green Street Advisors found that its CPPI increased by 2% as of April, citing that properties have increased in value by more than 40% from 2009. The firm evaluates CPPI by a time series of unleveraged US commercial property values that captures the prices of current transactions being negotiated and contracted.
“The rebound in pricing that began in the middle of 2009 has continued,” says Mike Kirby, Green Street’s director of research, in the report. The study notes that two-thirds of the decline that occurred from 2007 through 2009 have been erased, and prices are back to where they were five years ago, but still 10 to 15% shy of their peak. “The combination of improved access to capital, return hurdles that are low compared to historic norms and strengthening property fundamentals has caused buyers to become much more aggressive."
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