Commercial Real Estate Prices Dip
Moody’s Investors Service is reporting that U.S. commercial real estate prices declined by 3.7 percent during the month of April, as distressed prices masked the price recovery seen in larger, higher-quality assets.
The commercial property sector continues to struggle with slumping demand, and April marks the fifth straight decline in the Moodys/Real Estate Analytics LLC commercial property price index. On the bright side, the price recovery that began a year ago among “trophy properties” in the biggest U.S. markets continued unabated.
Tad Philipp, Moody’s director of CRE research, states, “In April, we continued to see a case of where the strong are getting stronger and the weak are getting weaker. Major asset/major market prices have recovered more than half of their post-peak losses, while prices for distressed transactions have continued to bounce around the bottom.” Distressed property sales have now made up at least one-fifth of the repeat-sales transaction volume for 17 consecutive months.
Source: “Moody’s: US Commercial Real Estate Prices Fall 3.7 Percent in April,” The Wall Street Journal, Melodie Warner (June 23, 2011)
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Commercial Real Estate Prices Show Gains
Green Street Advisors, independent research firm, reported that its commercial property price index rose 2 percent in November and was up 30 percent from the industry low in 2009.
“Half of the decline in values that occurred from 2007 to 2009 has been eradicated. Nevertheless, values remain roughly 20 percent shy of their peak,” said Mike Kirby, director of research for Green Street.
Unlike many indexes, which are based on closed transactions, Green Street records transactions as they go under contract.
Source: Green Street Advisors (12/02/2010)
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Commercial Real Estate Yields Spur Investors
Yields on U.S. commercial real estate are nearing a record high compared to Treasury bonds. Many investors take that as a signal to buy property.
Capitalization rates, a measure of real estate yields, averaged 7.22 percent in the second quarter, as calculated by the National Council of Real Estate Investment Fiduciaries. That was 4.29 percentage points higher than the yield on 10-year government bonds as of June 30 and 4.75 percentage points higher than Treasury yields as of Aug. 31.
These returns are near the record 5.39 percentage points in the first quarter of 2009, when the U.S. was dealing with the worst economic downturn since the Great Depression. The spread shrank to less than 80 basis points when commercial real estate prices peaked in 2007.
“The data indicate that real estate is poised for a rebound,” says Gerardo Lietz, who advises pension funds on property investments.
Source: Bloomberg, Hui-yong Yu (09/01/2010)
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Commercial Real Estate Said to Turn Corner
U.S. commercial real estate prices rose 3.6 percent in May, according to Moody’s/REAL Commercial Property Price Indices CPPI. This is the second consecutive month of increases – prices were up 1.7 percent in April.
“The positive news of increasing prices over the past two months is tempered by low transaction volumes, forecasts for slowing macroeconomic growth and the rising risk of a double dip recession,” said Moody’s managing director Nick Levidy in a statement.
Prudential Financial executives, speaking at a market outlook discussion, said they were “reluctant optimists” about commercial real estate. “As it cranks up, it’s going to start going pretty quickly in the next three, four years,” he predicted.
Sources: The Wall Street Journal, A.D. Pruitt (07/19/2010) and CNBC.com, Jeff Cox (07/21/2010)
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Long Recovery Ahead for Commercial
Noted analyst Kenneth Laub told Bloomberg that the current downturn will overshadow recent commercial real estate downturns.
“It won’t be a typical part of a cycle where we’re down for two or three years and things recover,” says Laub, whose New York firm, Kenneth D. Laub & Co., has managed more than $40 billion worth of transactions since 1969. “It will be longer than we’ve gone through before.”
The difference today, Laub says, is the volume of debt financing that pushed up prices dramatically and left property owners struggling to make mortgage payments.
“It’s not a supply-demand thing; it’s an overleveraged condition,” Laub says.
He predicts years of restructuring. “What you’re going to see is a tremendously long workout period unprecedented in commercial real estate in this country,” Laub says. “That’s where we’re going, and it’s just beginning.”
Source: Bloomberg, Beth Williams and Stuart Bern (10/13/2010)
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Decline in Commercial Real Estate Sectors Appears to be Slowing.
Commercial real estate activity has suffered from a severe credit crunch for commercial sectors, sustained job losses and weak consumer spending, although the decline appears to be slowing. A forward-looking indicator shows commercial real estate will remain weak into 2010, but recent actions by the Federal Reserve should improve some flow of capital into commercial lending, according to the National Association of Realtors®.
The Commercial Leading Indicator for Brokerage Activity1 declined 1.3 percent to an index of 101.5 in the second quarter from a downwardly revised reading of 102.8 in the first quarter, and is 13.7 percent below the 117.6 recorded in the second quarter of 2008. The index is at the lowest level since the first quarter of 1994; NAR’s track of the commercial leading indicator dates back to 1990. Full Story..
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More Losses Predicted for Commercial Market
Ranked among the biggest U.S. commercial real estate lenders by Moody’s Investors Service, Capmark Financial Group Inc. recorded a $1.6 billion quarterly loss and hinted at a possible Chapter 11 bankruptcy filing.
The Pennsylvania-based firm’s possible failure may signal a new wave of commercial property losses for banks.
Capmark has seen tough times, as the default rate on commercial mortgages held by U.S. banks has more than doubled to the highest level in 15 years.
Sam Chandan, chief economist at Real Estate Econometrics LLC, warns: “We haven’t really experienced the full extent of the distress. When you look at community banks and some smaller regional banks, they tend to have a far greater concentration in terms of their exposure to commercial real estate.”
Source: Linda Shen, Bloomberg (09/04/09)
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Commercial real estate gets worse
The commercial real estate downturn is deepening, threatening to slow the economic recovery.
To try to contain the damage, the Federal Reserve said Monday that it will extend into 2010 a program to help investors buy commercial property loans. But some say that will have limited impact.
“We seem to be nearing the end of the recession but the situation in the commercial real estate market is getting worse,” says Patrick Newport, an analyst at IHS Global Insight.
About $83 billion of office, retail, industrial and apartment properties have fallen into default, foreclosure or bankruptcy this year, says research firm Real Capital Analytics. The default rate for commercial mortgages jumped from 1.62% to 2.25% in the first quarter and should hit 4.1% by the end of the year, says Sam Chandan, president of Real Estate Econometrics. The carnage will likely cut half a percentage point off economic growth this year and in 2010, Newport says.
Fueled by easy credit, developers built too many shopping malls and office buildings from 2004 to 2007. As the economy soured, vacancy rates rose. Property values are down about 40% from their 2007 peak, Deutsch Bank says, and loans for commercial properties have come to a virtual standstill.
By Paul Davidson, USA TODAY
Full story…
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Commercial Real Estate Hurt by Credit Crunch and Weak Economy.
The general economic downturn, complicated by a severe credit crunch in commercial real estate, is dampening commercial real estate activity. In addition, a forward-looking index shows the forecast for commercial real estate sectors will remain weak for the remainder of the year, according to the National Association of Realtors®.
Lawrence Yun, NAR chief economist, said commercial real estate has been hit by a double whammy. “Significant job losses have reduced the demand for commercial space, while a lack of credit has stalled transactions and refinancing activity,” he said. “It is critical for the Federal Reserve to increase liquidity by purchasing commercial mortgage-backed securities. Because commercial real estate always lags an overall economic recovery, it will take some time for the commercial real estate market to rebound.”
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