Commercial Property Prices Drop in May
Jul 24, 2008 - CRE News
Commercial property prices declined 3.5 percent in May, their largest monthly drop since credit markets went into turmoil about a year ago.
Pricing in May was down 8.8 percent from its peak last October, as measured by Moody's/Real Commercial Property Price indices. The indices' all-property type component has dropped every month since registering a 2.1 percent gain in February.
Meanwhile, properties that traded hands were far more likely to provide lower rates of return than properties that sold before the credit crunch. Assets with annualized rates of return of less than 10 percent accounted for 65 percent of May's closed sales, up from the 50 percent they accounted for in May 2007, while assets with returns of 10 to 20 percent accounted for about 20 percent of May's deal volume, down from about 30 percent in May 2007.
And owners are trying to hold assets longer, according to Moody's Investors Service's analysis of the index data, which noted that the average hold period for the assets that sold in May was 88 months, up from a 70-month average hold period for the assets that sold in May 2007.
"In a weaker market, fewer owners are motivated to sell," Moody's said.
The indices, also known as CPPI, are a collaboration of Moody's and Real Estate Analytics and weigh property values based on completed repeat sales across all commercial property sectors. The national all-property index is reported monthly, while indices for sector and geographic market activity are reported quarterly.
Meanwhile, the S&P/GRA Commercial Real Estate Indices measured a 90 basis point decline in property prices in April. That series of indices is based on sales of all assets, not just repeat sales, and uses a formula that includes three-month rolling average prices. Standard & Poor's and GRA/Charles Schwab Investment Management manage those indices, which record monthly tallies by sector and geographic region in addition to nationwide.
The Pacific West and Middle Atlantic South regions were the worst-performing markets in the S&P/GRA's April indices, with declines of 2.6 percent and 2.2 percent, respectively. In the preceding month, the Pacific West improved 1.7 percent while the Mid Atlantic South dropped 10 bp.
The Midwest rose 1.3 percent in April, after a 70 bp gain in March, while the Desert Mountain West rose 50 bp, down from a 1 percent gain in March, and the Northeast rose 30 bp after a 1.4 percent drop in March.
Office led all property sectors with a 50 bp gain in April, followed by the warehouse sector's 20 bp gain, and declines of 2.3 percent for multifamily and 20 bp for retail.
