Commercial Real Estate Prices Break 13-Month Losing Streak

After a 13-month run of steady price declines, U.S. commercial property prices rose 1 percent in November, Moody's Investors Service said this week.

Despite the short-term boost, Moody's says it expects prices to resume falling in the coming months as occupancyand rental rates continue to decline, but depreciation should be less severe than the sector experienced in the middle of 2009, when some index readings showed price dives in excess of 5 percent.

"The positive 1.0 percent return recorded in November represents a bit of good news for the commercial real estate market, but the sector is not yet out of the woods," said Nick Levidy, Moody's managing director. "We anticipate further deterioration in property fundamentals and increases in cap rates, although the worst of the value declines is likely over."

According to Moodys/REAL Commercial Property Index, prices in the commercial real estate sector began falling

over two years ago, with significant declines seen throughout 2009. The increase in November puts aggregate prices 43 percent below peak values according to the CPPI.

"Prices in the commercial sector will rebound off the bottom as markets recover, but we expect that commercial property prices will ultimately flatten out for the longer term at levels 30 percent to 40 percent below the peak," the report said.

Levidy says prices for properties with short-term leases, such as multifamily, could show signs of a sustainable recovery later this year, while other property types will likely need longer to turn the corner.

The CPPI report notes that although price declines first picked up steam in the residential sector, the overall depreciation has been larger for commercial properties.

Citing the Case-Shiller Home Price Index, the report concludes that home prices peaked in August 2006 " that's more than a year before the October 2007 peak for commercial property values.

The data shows that after falling for 30 months, home prices hit bottom in April 2009 and lost just over 30 percent in value. "Since April, prices have rebounded slightly, but have seen no significant growth in the last two months' returns," the report says.

Commercial property prices, on the other hand, have fallen further over a shorter timeframe. According to the CPPI from Moody's and REAL Capital Analytics, "After two years of value declines, commercial real estate reached its lowest value yet in October '09, nearly 44 percent below the peak level."