So, what is the state of the commercial real estate market. That tis the question?

Here is perhaps a glimmer of understanding — and some hard data – at the end of April 2008. Once again, we are trying desperately to read the tea leaves as to what the future holds ….

US commercial real estate prices crept up in February 2008, but it is still too early to say IF a recovery is underway, according to Moody’s.

The Moody’s/REAL Commercial Property Price Indices [CPPI] stood at 191.24 in February 2008, an increase of 2.1% over the previous month, 4.2% over the same period of the previous year, and 12.9% over two years.

Moody’s noted that the index measures the change in prices of completed transactions and does not represent or track market sentiment that is not embedded in prices of completed deals.

Fewer repeat sales were completed in February 2008 than in recent months, Moody’s said.

“However, the loudest and strongest voices of market sentiment typically come from market participants who are transaction-driven (that is us!). Originators, investment advisers, and brokers who depend on transaction fees see a horrible market - because there are fewer deals.”

The fact that there are very few distressed assets in the marketplace is an indication of few compelled sellers, Moody’s said, and sellers who are dissatisfied with pricing or loan terms simply pull assets off the market.

Accordingly, evidence is accumulating of an increasing number of “busted” deals, where negotiations were started but never completed, most commonly for lack of agreement between buyer and seller on a “fair” price and/or the buyer’s inability to access capital.

In the meantime, those deals that are completed/executed - and are therefore captured in Moody’s/REAL CPPI - inherently involve stronger buyers who can get loans at terms they consider viable and prices that usually embed price appreciation, Moody’s said.

For the time being, a large gap persists between what buyers are willing to pay and what sellers are willing to accept, with little or no pressure on sellers to buckle, Moody’s said.

“If sellers were forced to sell, as can occur when banks foreclose on loans and subsequently sell off the collateral property, a more dramatic drop in prices would likely result.

However, when sellers are not compelled to sell, prices do not or can not adjust. In fact, prices can hover at some level in nominal terms for an extended period before responding to a changed market environment.”

Indeed, US housing prices hovered at approximately the same level for over a year throughout 2006 before turning decidedly down, as noted in the chart below.

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Posted in Real Estate Brokers, Developers, CMBX, Attorneys, Bankers, Commercial Title Companies, Market Trending, Historical Perspective, Commercial Real Estate | 2 Comments