Commercial Property Values Head South Again

Moody’s Investors Service reported last week that its index for commercial property values fell 2.6 percent in February. It was the first decline recorded by the company in four months.

The drop pushes the Moody’s/REAL Commercial Property Price Indices (CPPI) 42 percent below their October 2007 peak. The ratings agency says commercial real estate values are down 26 percent compared to just a year ago.

“From November to January, commercial real estate prices increased by an aggregate 6.3 percent,” said Nick Levidy, managing director at Moody’s. “As noted in our previous reports, however, we did not feel that these increases were sustainable in the short term, particularly given current low transaction volumes. With continued low volume in February and a larger proportion of repeat-sales sales considered distressed, it is unsurprising that prices have once again headed lower.”

According to Moody’s report, while interest in high-quality properties appears to be picking up, transaction activity in the core of the commercial real estate market remains muted.

Overall, transaction volume declined from January to February by 10 percent as measured by dollars, and by nearly 30 percent in the number of deals. The CPPI calculation included 66 repeat sales totaling roughly $540 million.

The share of distressed sales in Moody’s repeat-sales database has increased significantly over the last couple of years. In 2008, just 4 percent of resales were identified as distressed. That figure jumped to nearly 20 percent in early 2009, and in February of this year, constituted nearly one-third at 32 percent.

Moody’s says the stark high-low split in the market when it comes to property quality, together with the effect of distressed sales on overall price levels, will likely cause markets to bounce up and down over the near term.

“We do not expect prices to establish a clear trend until volume picks up and market-clearing prices are established for distressed properties,” the ratings agency said.

San Diego commercial real estate