Sunday, January 31, 2010

The Canary in the Coal Mine: US Commercial Real Estate Values Showing Dramatic Declines


Many of the banks announcing 4th quarter 2009 earnings cite continued concerns about their commercial real estate (CRE) portfolios. One of the reasons for declining CRE credit quality is a drop in the value of the underlying real property. This mirrors the challenge being faced by homeowners; as home values decline, borrowers end up owing more money on the property than it is worth.

The Moody’s/REAL commercial property index (CPPI) tracks the value of commercial real property over time. The index is unique in that it tracks same-property round-trip price changes based purely on the documented prices in completed, contemporary property transactions. The index was established in January 2001 with a base value of 1.00. National commercial real property values are currently down 42% from their 3rd quarter of 2007 peak. (Click on image to enlarge).
While the index dropped more than 10% in the 3rd quarter for apartment and office buildings, retail buildings rose 2.5%. While one data point does not represent a trend, the national index (published monthly) showed a 1% increase in November, the first monthly increase since September 2008. The original data can be found at: MIT Center for Real Estate.

Stay tuned. The trend in commercial real property values is an important indicator of how commercial real estate lending portfolios will fare in 2010.

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