Monday, March 22, 2010

Commercial Real Estate Bottoming?

Commercial real estate prices rose for the third straight month, bouncing from an epic collapse, on lower volume (less transactions), but higher dollar volume.

Before we jump into the details, as Calculated Risk notes:

Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices.
The below two charts (index level and year over year change), both show what appears to be a bottoming in the commercial real estate market.

Year over Year Change

So have we hit a bottom? For the time being... possibly. But longer term, I am not so sure in nominal terms and even less confident in real terms.

Lets put the current price level in perspective. We have come a LONG way (down 44% from peak to current trough), but price levels are now just slightly below the level seen in January 2001 (in real terms). What's different now than then?
  • Less demand (3,000,000 less people employed and office vacancy rates at 18% [up from 8%] in 2001)
  • Significantly more supply (anyone have a source for square footage?)
  • Less credit available for purchases
Source: MIT


  1. Commercial real estate is tied closely to the retail market. If we get healthcare costs down, credit card debt down, wages up, and most importantly unemployment down, the commercial real estate sector will react very quickly in a positive way. Or course that's a long 'wish' list.

  2. As I was reading your comment, I was about to say that's a long list...

    We can definitely hope!

  3. The location of commercial real estate plays a crucial role in the success of a business. In today are tough economic times, business owners need to reexamine all aspects of their business. Smart businessmen continue to assess their staffing and inventory needs, cutting down costs and reinvesting the limited funds sensibly.

  4. You have a really good point about the commercial real estate industry. It will be interesting to see if this increase and optimism holds firm. Thanks for the article.

  5. On the whole, the commercial real estate market is no where near the bottom. There are definitely some pockets where signs suggest the market is picking up but on the whole, the market is down and will continue to plummet as balloon payments begin to come due. The office sector is shaky as is the retail sector.