Tuesday, June 22, 2010

CRE Prices Increase 1.7% in April?

The Moody’s/REAL All Property Type Aggregate Index measured a 1.7% price increase in April. This price increase follows two consecutive months of slight price declines. The index currently lies at 113.10 and has fallen 16.4% in the past year. Prices have remained choppy since the low of 107.98 that was recorded in October 2009. Since that low, prices have rebounded 4.7%. The peak of the index occurred in October 2007 and prices are currently 41.1% below the peak.

However, it is important to note a couple of things in this regard. First, transaction volume is still very low and without higher volumes it is difficult to conclude that prices have stabilized. The retrenchment of commercial real estate markets over the past two or three years has been orderly for the most part, without an enormous flood of properties hitting the market all at once. If banks and servicers were to decide suddenly to unload their distressed properties, the resulting supply of struggling properties could cause another leg down in prices. Second, even if a bottom forms at current levels, the market could bump along for several quarters as weakening fundamentals (for some property types) and the specter of interest rate increases in the future conspire to hold down values. Anemic macroeconomic growth, stubbornly high unemployment, and the impact of the spreading sovereign debt crisis in Europe on the US recovery threaten to delay any sustainable upturn in US commercial real estate prices.

The number and volume of repeat-sales transactions fell in April, with 114 repeat sales and a total balance of just under $800 million. While the number of sales declined only slightly from last month, when 127 repeat sales took place, sales volume is down by more than 50% from last month. The average repeat-sales size dropped from just over $13 million per sale to less than $7 million per sale.