Commercial Real Estate Shows First Gain Since May
Business + Economy

Commercial Real Estate Shows First Gain Since May

Commercial real estate (CRE) prices jumped 4.3 percent in September, according to numbers released on Monday. This was the largest one-month increase since Moody’s Commercial Property Index first started tracking such data in 2001,

The gain, the first since May, was attributed to individual sales. The market for commercial property remains thin, so any small increase or decrease in sales can greatly affect price indices, said Christopher Cornell, an economist with Moody’s. “We don’t think recovery will be overnight,” he added. “It will be painfully slow, but it’s looking up.”

“Each of the summer months this year recorded declines in the 3 to 4 percent range, followed by this month’s sizable uptick,” said Nick Levidy, a managing director at Moody’s, in a statement. The improvement corrects the market after downturns and leaves property values at approximately the same level of a year ago. 

Still Needed: More New Jobs
Experts say that the commercial real estate market won’t truly rebound until job creation boosts demand for office, retail, hotel and other commercial properties. The Labor Department just reported that businesses and other employers added jobs in 41 states in October, the best showing in five months.

Real estate values typically lag behind an economic recovery by six to 18 months; improvement isn’t expected for the sector before 2012 at the earliest. “We vaguely expect some increases next year,” Cornell said. A rise would result from key drivers of demand, such as on-site employment and retail sales.

Other leading indicators, such as transaction volume and capital markets, have also pointed to a slow but steady recovery, said Richard Juge, President of RE/MAX commercial brokers in New Orleans. “Getting the capital markets flowing again is what affects the CRE market the most,” he said. “When you can free up capital lending, it has a huge impact.”

In the meantime, though, the risks still remain high in the CRE market, which accounts for 6 percent of U.S. GDP. And a staggering $1.4 trillion of commercial real estate loans will come due nationwide in the next four years, forcing borrowers to find new financing or to default on their obligations. 

Property prices remain far below their pre-recession levels. Typical commercial property values are 42.7 percent lower than during the market’s peak in late 2007. Many property owners are holding “underwater” mortgages -- they owe more than what the property is worth. 

There was a similar slump in the CRE market during the savings and loan crisis in the late 1980s, but this time around the size of the downturn is different, said Cornell. According to Standard & Poor’s, the market’s growth has provided healthy risk diversification, but has caused the losses to be more widespread among investors.

Moody’s CRE index also found that delinquency rates for bank-held commercial mortgages, which represent nearly half the volume of all commercial mortgages outstanding, have been steady over the last two quarters. The latest set of data from Moody’s also revealed a trend of split market performance, as trophy properties are commanding higher prices while lower-grade properties and distress sales continue to suffer lower prices.

Bloomberg reported that the biggest single-property sale to close in September was a $208 million deal for Union Bank Plaza, a 627,000 square-foot office building in Los Angeles.

Home Sales Still in the Tank
Existing home sales in October declined 2.2 percent after two months of strong gains -- far below what economists had predicted, according to a report by the National Association of Realtors (NAR). Existing home sales stand at 4.43 million, down from 4.53 million in September, and are below the 5.98 million-unit level of October 2009, when sales surged prior to the first-time homebuyer tax credit. Economists had predicted a decline to a 4.48 million pace for October.

“The housing market is experiencing an uneven recovery, and a temporary foreclosure stoppage in some states is likely to have held back a number of completed sales,” said Lawrence Yun, an economist with NAR. “Still, sales activity is clearly off the bottom and is attempting to settle into normal sustainable levels.”

Economists point to October’s decline as a result of last month's temporary freeze on foreclosures by some major banks. Several other factors, including tight credit, have made it extremely difficult for creditworthy borrowers to land a mortgage. Yun expects home sales to improve to levels above 5 million by this spring.

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