Thursday, June 25, 2009

Moody's Report Shows Continued Decimation of Commercial RE

The chart above, courtesy of MIT's Center for Real Estate, illustrates the data contained in Moody's most recent report on the state of commercial real estate. For those of you who are unaware, there is a two month delay in the actual data, i.e June's report presents data that is current only as of the end of April. We've been wanting to do an old fashioned parsing of the Moody's/REAL Commercial Property Price Index and its underlying methodology, but we haven't found the motivation to do so yet. Regardless, the chart is not pretty. CRE prices appear to be in a literal free-fall, with the index posting a Month-to-Month decline of 8.6%. That's correct, meaning that between March and April of 2009, the value of CRE properties nationwide fell at an annualized rate of 33.9%. With the April year-to-year loss reported at 25.3%, it would appear that the pace of the decline in the commercial market is accelerating. The most despair inspiring corners of the market, listed in descending order based upon the sheer level of despair caused by the annual rate of decline, was South-Industrial(-28.8%) , East-Office(-27.2%), South-Office(-25%) and South-Retail(-23.3%).

The most popular explanation for the severe price declines is that we are just beginning to see closings of deals that were negotiated towards the end of 2008 - a time when the peddling of "Depression survival kits" likely reached its peak. While we will sign onto the validity of that assumption, we will not conclude from it that stabilization of this Market is just around the corner. The financial crisis portion of this recession may have abated, but CRE will still have to deal with economic contraction that has ensued as a result of said financial crisis. The de-leveraging process is continuing, and although Fed/Government actions will reduce the acuteness of the pain at any one given point in time, the inescapable truth is that even the Fed can not grant amnesty to multi-decades long debt agglomeration binge.
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