Wednesday, August 19, 2009

Commercial Real Estate: There Goes the (Entire) Bubble

Bloomberg reports:

Commercial real estate values in the U.S. fell 27 percent in the year through June and rents for offices, shops and warehouse space may continue to drop through 2010 as the recession saps jobs and consumer spending.

The Moody’s/REAL Commercial Property Price Indices fell 1 percent in June and are down 36 percent from their October 2007 peak, Moody’s Investors Service said in a report today. A rebound isn’t likely until the second half of next year, the National Association of Realtors forecast in a separate report.
Calculated Risk notes:
Beware of the "Real" in the title - this index is not inflation adjusted - that is the name of the company (an unfortunate choice for a price index). Moody's CRE price index is a repeat sales index like Case-Shiller.
Which of course gave me the idea to show the index in both nominal and real (backing out inflation using CPI) terms.

Talk about full circle... BUT, it is likely far from over. Back to Bloomberg.
Unemployment of 9.4 percent, falling industrial production and a drop in consumer spending curbed property demand, NAR said. Falling rental income and scarce credit are hurting both landlords and investors in securities backed by commercial property loans. Defaults and late payments on commercial mortgage-backed securities may surpass 7 percent by year-end, according to research firm Reis Inc.

“It’s too soon to call the bottom,” said Connie Petruzziello, a Moody’s analyst and co-author of the commercial property price report.
Source: MIT


  1. jake this is too pessimistic. We are clearly in a bottoming process. Its much less risky to buy commercial property now then 2-3 years ago.

  2. negatives:

    1) tighter financing standards
    2) lack of demand (unemployment)
    3) the oversupply
    4) likely forced selling in coming years


    1) valuation
    2) lack of new construction we'll likely see for 5-10 years

    the question is which outweighs the other?

  3. My business is currently looking to purchase a warehouse in the city of Seattle and valuation are still a joke. If you bought any of the warehouse for sale in the South end, you could not even cover the mortgage with the rent you received. The ridiculous thing is that there are for lease signs all over the place and there is still new supply coming onto the market. This city has a long way to go before it hits bottom.