�
�
�
�
�
�
�
�
�
Add this page to your favorite Social Bookmarking websites
 |
How Bad Are Commercial Values?
Or Why Now Might Be the Best Buying Opportunity in Decades
Ted C. Jones, PhD
Senior V.P./Chief Economist
Stewart Title Guaranty
How much down have commercial property values trended? What are values today if you purchased in the past decade—or in recent years? Is commercial real estate duplicating the housing bust all over again?
The lack of liquidity in commercial lending perhaps is best mirrored in the movie “Honey—I Shrunk the Kids.” Not only did they shrink, but the kids had to fight just to survive, until ultimately they returned to normal. Ditto commercial real estate, as lending volumes for purchase and refinance transactions have shrunk (or literally disappeared).
Real Capital Analytics reported that total U.S. commercial sales volumes plummeted from $557.8 billion in 2007, to $181.6 billion in 2008, to a miniscule $54.4 billion in 2009.
As in any leveraged investment, so goes lending availability and costs, so goes value. And values have plummeted as lending has evaporated. Compared to 2007 total commercial lending was down 63 percent from 2007 to 2008, and another 50 percent from 2008 to 2009 (per the National Mortgage Bankers Association based on averaging their quarterly lending index). When comparing 2009 to 2007, commercial lending was off 81 percent. That’s a train wreck.
|
'Simply stated, this is the best buying opportunity for commercial real estate since 1988 or 1989. Fortunes will be made by those who act.' |
Several months ago, Deutsche Bank analysts said "tougher underwriting standards and an eventual 50 percent drop in property values would prevent a vast swath of commercial real estate borrowers from refinancing their loans as they come due over the next four years." Keefe Bruyette and Woods (KBW) reported in December 2009 that commercial values had already declined 40 percent from the peak with an expectation for another 6 to 8 percent decline yet to be seen.
So how far have values declined, and are Deutsche Bank and KBW even in the ball park?
While it is impossible to pinpoint the value change of any specific commercial property without doing a full-blown appraisal, we can talk reasonably knowledgeably regarding major price trends. Unlike residential real estate, commercial is more nationally and internationally held, with investor motivations being return driven.
The MIT Center for Real Estate tracks prices from properties sold from the National Council of Real Estate Investment Fiduciaries database. NCREIF basically consists of tax-exempt (retirement managed) real estate and the organization generates a total property returns index (see the data links below). These price changes vary across property types and across location, representing a data base of 6,211 properties with an estimated market value of $238.3 billion as of Q4 2009.
Of course how much property values have declined is relative to the time of acquisition. Using the MIT data, a grid comparing implied current values based on time of acquisition follow in the table below. It shows the estimated current change in value since the date of purchase as of Q4 2009 of income-producing real estate across multiple property types.
This data would estimate, for example, that an apartment property purchased in the first quarter of 2003 is now worth 12.5 percent more than the purchase price. A retail property bought in Q3 2007 is worth only 70 percent of the purchase price—i.e. down 30 percent in value. And an industrial property bought in the third quarter of 2003 is probably worth today what it cost at the time of acquisition.
The impact? Limited refinancing capacity and lending on new purchases will continue to put pressure on commercial real estate values (from the glass half-empty perspective). Yet prospective buyers have not seen opportunities like this since the late 1980s provided they bring significant equity to the table (the glass half full view). Simply stated, this is the best buying opportunity for commercial real estate since 1988 and 1989. Fortunes will be made by those who act.
And these depressed prices should give a rally cry to all property owners: “This is the time to vigorously appeal property taxes.” And be aggressive!
Ted C. Jones, PhD, is director of investor relations for the Stewart Information Services Corporation and senior vice president and chief economist of the Stewart Title Guaranty Company. Prior to joining Stewart, he served as chief economist at Texas A&M University’s Real Estate Center, the nation’s largest publicly funded real estate research group. Reprinted with permsission from his blog, which can be found here.
( 3 Votes )
Add this page to your favorite Social Bookmarking websites
