Commercial real estate prices fell 4% as the economy stumbled in June, marking the first monthly price decline of the second quarter and the third decline this year, according to the Moody’s/REAL All Property Type Aggregate Index.
Three of the first six months of 2010 brought declines in the all-property index. June’s dip curtailed a fledgling growth trend in commercial real estate values without entirely wiping out recent gains, according to the index, which tracks values through repeat sales data.
The all-property index is down 0.9% for the year but remains 4.2% above the recessionary low point that it reached in October 2009. Since the market peak in October 2007, commercial real estate values measured by the index have deflated by 41.4%.
“We expect property prices to remain choppy for some time as commercial real estate markets and the broader economy continue their slow recovery from the recession,” Moody’s researchers wrote in an Aug. 19 special report. “Sovereign debt problems, lingering unemployment in the United States, and heightened concern about a double dip recession and even deflation operate as a drag on investment activity, notwithstanding historically low interest rates.”
Indeed, economic growth has slowed considerably since the beginning of the year. Gross domestic product, a measure of the nation’s economic output, grew at an annualized rate of 2.4% in the second quarter. That number fell well below most economists’ forecasts and marked the second consecutive quarterly decline in economic growth.
As of the end of June, apartment prices nationwide are down 30.5% from a peak in the first quarter of 2007, according to Moody’s. Office prices have declined 30.8% since that sector peaked in the second quarter of 2007, and retail property values are down 39.3% from their peak in the third quarter of 2007. Industrial prices peaked in the fourth quarter of 2007 and are down 35.3%.
Differing metro results
The less data available for index calculations, however, the more an index is subject to skewing by individual data points. That may explain why price trends for the nation as a whole as revealed by the Moody’s/REAL Indices so far this year don’t entirely jibe with index results for the 10 largest metropolitan areas.
National office and apartment values increased 3.9% and 4%, respectively, in the second quarter from the first quarter, according to the indices, while retail and industrial prices declined 10.9% and 2.9%, respectively.
Looking at only the 10 largest metropolitan areas, however, office values fell 5.3% from the first to the second quarter, the largest decline of any property type and contrasting sharply with the increase found in national numbers. Retail properties in the top 10 metros also bucked the downward national trend in asset prices, increasing in value by 2% from the first to the second quarter.
Only apartments showed consistent quarterly gains at both the national level (6%) and among the top 10 U.S. markets (4%). Industrial values declined from the first to the second quarters, both at the national level with a 2.9% drop, and in the 10 largest markets, where industrial values fell 1.6% in the same period.
Significantly, the number and dollar volume of commercial real estate transactions is increasing. There were 153 repeat transactions in June, nearly doubled from 107 transactions in May. The dollar volume of transactions increased to $2.1 billion in that month from $1.5 billion in May.
If transactions continue to proliferate, it may be a sign that buyers and sellers are reaching an agreement on market pricing, according to Moody’s. “If this is in fact occurring, we would expect transaction volumes to continue a steady rise and price volatility to start to ebb in the months to come,” Moody’s researchers wrote in the special report. “Several more months of data is needed before we can draw any firm conclusions on this point.”