When it comes to predicting the future of the commercial real estate market, quirkiness is certainly in the air these days. Even when some good news finally appears, a cloud invariably seems to be lurking overhead.

Here is the good news. MIT commercial property price index turns higher. The cloud foreshadowing this good news is that data shows widening disconnect between buyers, sellers.  

Generally speaking, commercial properties, which produce regular income and serve as a major investment asset class, are generally still experiencing good performance in terms of high income, good occupancy, low commercial mortgage delinquency and substantial equity capital interested in buying such property. While prices for properties such as shopping malls, apartment complexes and office towers are still some 6 percent below peak values, there may be a ray of light in real estate markets.  

Despite signs of a widening disconnect between buyers and sellers, transaction sale prices of U.S. commercial property owned by institutional investors rose 2.1 percent in the first quarter of 2008 after two consecutive quarterly declines, according to an index produced by the MIT

BEWARE, HOWEVER: There is a more nuanced story behind the modest first-quarter uptick. The MIT/CRE publishes not only the price index based on closed deals, which rose 2.1 percent, but also compiles indices that separately track movements on the demand side and the supply side of the property market.

• Demand Side Fell: The demand-side index tracks the changes in prices that potential buyers are willing to pay (sometimes called a “constant-liquidity” index of the market, because that is how much prices would have to change to keep a constant ability to sell as many properties at the same rate of trading volume). That index continued to fall, by 4.6 percent, the third straight quarterly drop, for a cumulative decline of more than 14 percent versus the mid-2007 peak.

• Supply Side Rises: But prices of closed transactions did not fall, because the supply side of the market–the property owners who are the potential sellers–actually raised the prices at which they are willing to trade, by 9.2 percent in the first quarter, according to the MIT/CRE index.

Henry Pollakowski, MIT/CRE senior economist and co-director of the Center’s Commercial Real Estate Data Laboratory (CREDL), noted that the gap represents an historically sharp disconnect between supply and demand.

This quarter shows the biggest pulling away of supply from demand since 1991 and the third greatest in the 96-quarter history of the index,” Pollakowski said. The result of this ‘disagreement’ between property owners and would-be buyers is that the volume of closed transactions tracked by the index is down drastically, falling 47 percent from the last quarter of 2007 to the first quarter of 2008.

The implication is that commercial property owners are feeling little pressure to sell and little reason to bring their prices down to levels implied by the sentiment.

So, what is ahead for the commercial real estate market? Well, at some point, one side of the market or the other will have to blink, and who ever blinks first may depend on what goes on in the broader national economy.

Tags: commercial real estate

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