Saturday, February 05, 2011

Commercial Real Estate Makes a Comeback, Defying Predictions of a Meltdown, Crash and Crisis

February 2010 in the Huffington Post --  "There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public," says a report issued Thursday by the Congressional Oversight Panel, the bailout watchdog led by Harvard Law professor and middle-class advocate Elizabeth Warren.

MP: Around that time, there were many other similar predictions with headlines like "A Commercial Real Estate Bubble Set to Burst," the "Coming Collapse of Commercial Real Estate," and "Commercial Real Estate Collapse Bigger than Subprime Implosion," and "Commercial Real Estate Will Collapse (Forbes)."

Now we get a much different story from recent data released by MIT on commercial property transactions in 2010:

MIT Center for Real Estate (Feb. 2011)— "Transaction prices of commercial properties sold by major institutional investors gained 11.9 percent in the fourth quarter, and 19.3 percent for all of 2010, according to an index developed and published by the MIT Center for Real Estate.

Both of these returns were the second highest in the history of the index, which goes back to 1984. (The record-holding quarter remains the second quarter 2005 which had a 17.8 percent gain, and 2005 was the record year with a 27.2 percent price increase.) Measured on a total return basis, including net income generated by the properties (as well as the price gain), the 2010 result was 25.2 percent, which was also second highest after 2005’s 32.2 percent.
These results put the price index now within 27.9 percent of its 2nd-quarter 2007 peak value (measured as a fraction of that peak price, see chart above).

On a dollar value basis, fourth quarter index sales totaled over $3.7 billion, up $800 million over third quarter, and for all of 2010 index sales were $10.5 billion, more than double 2009’s extremely low $4.4 billion. This reflects a substantial increase in liquidity in the institutional property marketplace compared to 2009."

Bloomberg -- "From Manhattan office towers to apartments in Florida to retail properties in Washington, commercial real estate values are rising, defying predictions of a collapse that would drag the U.S. economy back into recession.

Prices of commercial properties sold by institutional investors surged 19 percent in 2010, the second-biggest gain on record, according to an index developed by the MIT Center for Real Estate. Investments in office properties, the largest part of the market, more than doubled last year to $41.6 billion, according to Real Capital Analytics Inc., which tracks commercial property sales globally.

Near record-low interest rates are luring buyers with the prospect of cheaper financing and higher returns. Lenders are beginning to sell distressed properties and loans as rising earnings give them a cushion to absorb losses. Investors, convinced the worst is over, have pushed prices on commercial mortgage-backed bonds to the highest level in two years."

5 Comments:

At 2/05/2011 11:56 AM, Blogger rjs said...

CRE Delinquency Rate Hits Record 9.34% - Even as banks are restarting the engines of their long-dormant commercial real-estate lending shops, old loans continue to fall into default faster than they can be worked out, with the delinquency rate for commercial mortgage-backed securities reaching a new high last month. The missed-payment rate for all U.S. CMBS hit a record 9.34% in January, according to figures of research firm Trepp LLC. "I think people at this point would have expected it to level off a little bit more,"

http://online.wsj.com/article/SB10001424052748704124504576118303071041230.html?mod=googlenews_wsj

 
At 2/05/2011 12:17 PM, Blogger Buddy R Pacifico said...

The evidence that institutional investors are buying commercial real estate is good news. These guys heavily influence prices but commercial real moves slowly.

Here is: MIT's Center for Real Estate developed Moodys/REAL Commercial Property Index (CPPI). This index includes "mom and pop" properties and shows a boom from 2001 to 2007 and then bust. Prices have leveled off and the big investors seem to be buying distressed properties.

Thanks to Prof. Perry for bringing MIT's work to the readers attention.

 
At 2/05/2011 12:53 PM, Blogger Buddy R Pacifico said...

rjs, one possible explanation of the disconnect between deliquencies and price turn-around may be here.

 
At 2/05/2011 2:08 PM, Blogger VangelV said...

There is no real turnaround. All we have seen is a stay of execution due to the money printing activities by the Fed, with QE 2 being the latest effort to keep all the balls in the air. And we have seen statistical manipulation hiding the real price collapse.

Many commercial units are operating with huge vacancy rates. The delinquency rate is still running at an unacceptably high rate with little evidence of an improvement. We see that to save the commercial real estate market the Fed is trying to devalue the currency. If is succeeds that will be a loss, not a victory for American savers.

 
At 2/05/2011 9:11 PM, Blogger aorod said...

Maybe things are improving in some central city areas, but not n suburban or fringe areas. Many small retailers are hanging on by a thread. Obamacare may push them over the edge.

 

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