The Moody’s/Real National All Property Index dropped 1.7% in March compared to February of this year. In addition, the index is about 21% lower than a year ago and about 20% lower than two years ago. This index tracks the change in sale prices for different property types based on sales of the same assets over time.
The index is a good measure of where commercial property prices are going. The largest year-over-year price drop (March 2009 vs. March 2008) was reported in Office — 28.8% decrease,followed by Retail — 18.5% decrease, Apartments — 16.1% decrease, and Industrial — 12.3%decrease.
Apartment and Industrial prices were only down 0.4% in 1Q09 compared to the previous quarter while office and retail were down 18.6% and 12.4% respectively in 1Q09 compared to the earlier quarter. Also, according to the report, sales volumes in March were down 75% from the year-ago period.
Some thoughts on where we are going:
- Commercial property prices continue to fall, and many owners who bought properties over the past couple of years are probably underwater on their mortgages
- There will be a continued rise in loan defaults, and banks will be trying to unload large numbers of commercial properties
- Lower-dollar deals are generally getting done vs. large transactions; financing for smaller properties is easier, which should make price drops in this class, >$15 million, less severe
- There will be no recovery in prices until fundamentals improve — most importantly job growth. Financing is still difficult and expensive to obtain; many lenders are requiring 25%+ equity and personal guarantees on CRE purchases, which drives away many potential buyers. As such, transaction volumes will be low throughout 2009
- The government has included CMBS in TALF, which will allow investors to use government money to buy loans. This could help prop up CRE values, but how effective this program is remains to be seen.
- When buying commercial real estate, focus on the larger markets where values hold up much better in a recession. According to the Moody’s report, y/y price drops were significantly lower in the top 10 MSAs for all major property types (Apartments, Industrial, Office and Retail).
