Commercial Property Values Turn Negative

Commercial Property Values Turn Negative Again

By: Carrie Bay
4/23/2010

Commercial real estate prices appeared to be stabilizing
toward the end of last year, but a new study shows price
declines have returned. Moody’s Investors Service reported
this week that its index for commercial property values fell
2.6 percent in February. It was the first decline recorded
by the company in four months.

The drop pushes the Moody’s/REAL Commercial Property Price
Indices (CPPI) 42 percent below their October 2007 peak. The
ratings agency says commercial real estate values are down
26 percent compared to just a year ago.

“From November to January, commercial real estate prices
increased by an aggregate 6.3 percent,” said Nick Levidy,
managing director at Moody’s. “As noted in our previous
reports, however, we did not feel that these increases were
sustainable in the short term, particularly given current
low transaction volumes. With continued low volume in
February and a larger proportion of repeat-sales sales
considered distressed, it is unsurprising that prices have
once again headed lower.”

According to Moody’s report, while interest in high-quality
properties appears to be picking up, transaction activity in
the core of the commercial real estate market remains
muted.

Overall, transaction volume declined from January to
February by 10 percent as measured by dollars, and by nearly
30 percent in the number of deals. The CPPI calculation
included 66 repeat sales totaling roughly $540 million.

The share of distressed sales in Moody’s repeat-sales
database has increased significantly over the last couple of
years. In 2008, just 4 percent of resales were identified as
distressed. That figure jumped to nearly 20 percent in early
2009, and in February of this year, constituted nearly
one-third at 32 percent.

Moody’s says the stark high-low split in the market when it
comes to property quality, together with the effect of
distressed sales on overall price levels, will likely cause
markets to bounce up and down over the near term.
“We do not expect prices to establish a clear trend until
volume picks up and market-clearing prices are established
for distressed properties,” the ratings agency said.