Moody’s: US Commercial Real Estate Prices Sink Past Post Peak Low in March

New York, May 23, 2011 — US commercial real estate prices as measured by Moody’s/REAL National — All Property Price Index (CPPI) fell 4.2% in March, bringing the index down to its lowest level since its peak in October 2007. A recent pick-up in the volume of transactions, however, is a positive sign for the overall commercial real estate market and sets the stage for recovery. A high volume of distressed transactions are weighing on performance, says Moody’s.

In March, there were 182 repeat-sales transactions totaling nearly $2.5 billion, a significant increase by both count and balance over February, says Moody’s. It was second highest number of repeat-sale transactions since 2008, the total only exceeded by that of December, 2010, which benefitted from being the end of the year.

The index is now 47.0% below its October 2007 peak.

“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. “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.”

In March 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),”says Moody’s Philipp.

In additional indices published this month, Moody’s quarterly national indices for the four property types all showed declines in first quarter 2011. Industrial recorded the largest decline, at -7.7%, followed by office, -7.1%, apartment, -4.7%, and retail, -4.5%.

In this month’s “From the Lab” section of the CPPI report, Moody’s analysts examine the price performance of major assets in major markets with and without the inclusion of distressed exchanges. Results suggest a trend of recovery in prices for these major assets and markets even when distressed exchanges are included, as these assets and 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,” added Philipp.

The report, “Moody’s/REAL Commercial Property Price Indices, May 2011,” is available on the company’s website, www.moodys.com. In addition, Moody’s publishes a weekly summary of structured finance credit, ratings and methodologies in “Structured Finance Quick Check” at www.moodys.com.