February 4, 2009
The MIT Commercial Real Estate Transaction Based Index tracks prices back to 1984. In the 4th quarter of 2008, the index fell by the largest it has ever fell in a single quarter, 10.6%. For the year, the index was down 15%. According to the press release,
The previous record was a 9 percent drop in the fourth quarter of 1987. The 15 percent fall in 2008 is also a record, topping the 10 percent and 9 percent declines in 1992 and 1991, respectively.
The index’s performance means that prices in institutional commercial property deals that closed during the fourth quarter for properties such as office buildings, warehouses and apartment complexes are now 22 percent below their peak values attained in the second quarter of 2007. The index has fallen in five of the past six quarters, but the recent drop is by far the steepest.
David Geltner, director of research at the MIT Center for Real Estate predicted the downturn in prices will be at least as bad as the downturn of the early 90’s based on the data. This will continue to keep CMBS spreads high as investors will seek to account for all default risk. With CMBS spreads as high as they are, it makes the opportunity cost of issuing new debt at low yields so high for investors that credit will continue to be essentially non-existent until prices stabilize, and supply and demand find some sort of equilibrium.
The full press release is available here and graphs for the data are below. Meanwhile, DealJunkie has an interesting link to a NYT post on why the commercial real estate fallout will not be as bad as many are predicting. Draw your own conclusions, but it’s safe to say that a lot of people overpaid for buildings during the period of 2005-2007, and we’ve only begin to see that shoe drop. The longer this thing lasts, the farther back we can go to find out who will also be facing their day of reckoning.
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