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Moody’s: CRE Prices Will Continue To Fall

January 26, 2010

Despite seeing a 1% uptick in November prices, Moody’s is indicating that it is very likely that commercial real estate prices will continue to fall.

“We anticipate further deterioration in property fundamentals and increases in cap rates,” he suggested, acknowledging that “the worst of the value declines is likely over.”

This goes to the heart of what we believe, and that is that the bottom is something which can be seen, that is, good commercial property will make it to market, and it will take time and effort to sell it. That simply isn’t the case right now, as virtually anything good or trophy gets snapped up.

Just look at 49 Stevenson in San Francisco. It recently sold for $24.5M. Was it worth $24.5M? Obviously it was to the buyer, but running the numbers it was hard to make sense out of that asset anywhere north of $20m if you looked at historic capitalization rates. You have to assume we’re in a “new normal” to make sense out of deals, but when you have deteriorating delinquency rates, resetting rents far below what in-place rents may be, and additional time on market, not to mention interest rate risk, it’s hard to see the bottom.

That’s not to say there haven’t been any deals, because there have been opportunities and deals which have occurred which looked good, but overall, most sellers continue have unrealistic price expectations.

At the low-end, owner-user end of the market, a bottom is likely close to forming, but anything investment grade above the owner-user threshold that requires bank debt will likely continue to suffer.

There will need to be a miraculous turn around for things not to either remain bad or continue to get worse.

Fitch Ratings, in a note last week to investors, said that default rates on commercial mortgages could reach 12 percent by 2012. Fitch’s numbers came in a negative report last Wednesday for U.S. life insurers, which invested heavily in bonds backed by commercial mortgages. Fitch said that U.S. insurers stood to lose $20 billion from their commercial real estate investments.

The last thing to note is that there might be external factors which drive prices which were not mentioned above. A big one, as was the case in 49 Stevenson is foreign capital. Tired of buying american paper, but eager to convert their dollars into something, foreign buyers – particularly Asian – may care little about earning a 6-7% yield, as the kicker for them might be the┬ádiversification, inflation hedge, or other benefit commercial real estate is perceived to offer.

[via McClathchy]

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Categories: Commercial Finance and Lending | Commercial Real Estate Investing | Trends
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Square Feet January 27, 2010

yes it's hard to compete when you have people buying on 7% caps on trailing earnings in a declining market. Taking a 6-7% yield on trailing earnings on a market that's turning up makes sense, but rents and occupancy rates are still on the decline. Occupancy you can deal with better if you're buying a Class A asset, but gambling on rents is not for everybody.

joshua January 26, 2010

last paragraph says it all. were trying to acquire retail centers and we make solid offers at market CAPs and were being beaten out by Asian buyers. when it comes to concern for yield, were being competitive. when it comes to price, we cant match them because of the lack of concern (or knowledge) for yield.

Mario Cerasuolo March 26, 2010

There are few trophy assets that are hitting the market on the sales side. I agree with you that they are getting snapped up and bid higher. Question is? Do you try to focus on somewhat distressed assets and transitional assets where there is more risk but a much higher return? Each case is different but it’s definitely something one should consider as Class A properties in Class A markets are few and far between…

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