The sharp drop in valuations of commercial real estate properties during the past year may be nearing a bottom, according to Los Angeles-based CB Richard Ellis Investors, in its recently released installment of “Investment Research Quarterly”.  Although the bid-ask gap remains wide between buyers and sellers, three indicators are providing some evidence that pricing will bottom out sooner than later.

First, the sharp pricing correction that has already taken place will continue to have a dramatic impact on sellers’ expectations, the authors of the report conclude. The NCREIF Property Index depreciated by 9.5% in the fourth quarter of 2008 and 8.7% in the first quarter of 2009, the two worst quarters in the history of the index that spans more than 30 years.

Over four quarters, the index registered a cumulative depreciation of 19.1%. “By contrast, during the last severe real estate downturn in the early 1990s, it took the NPI ten quarters — from the end of 1989 until mid-1992 — to register the same drop,” according to CB Richard Ellis Investors.

“The increasing willingness of investors to recognize lower value for assets they currently own is putting pressure both on the appraisers to lower values and sellers to reduce asking prices,” the report states. “This means that while the pricing downturn in the early 1990s took many years to bottom out, the current downturn is much sharper, and therefore may be shorter.”

Second, the recent upturn in the performance of publicly traded REITs is viewed as significant because REITs have historically acted as an early indicator of pricing declines and recoveries in private markets.  After bottoming out in March of this year, REIT stock prices rose 49% year-to-date through June. “Just as REITs led the private markets in 2007 and 2008, it is probable that the recent share price recovery is an early indicator that a trough in private markets is coming soon,” writes CB Richard Ellis Investors.

Third, the volume of property sales has fallen to such low levels that deal activity has no place to go but up. During the first five months of 2009, commercial real estate property sales totaled $13.8 billion, a 78% drop from the same period a year ago and 93% off the 2007 pace, according to Real Capital Analytics.

“As cash-constrained owners increasingly become unwilling sellers, transaction activity will pick up,” concludes CB Richard Ellis Investors. “An increase in sales will provide needed pricing information to both sellers and buyers. This transparency will both encourage more sellers to offer properties at realistic prices and provide buyers with the confidence to re-enter the market.”