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Distressed Deals Push Commercial Real Estate Prices to New Cycle Low

Prices on U.S. commercial real estate fell 4.2 percent in March, according to the national property price index released by ""Moody's Investors Service"":http://www.moodys.com this week. The latest drop brings the index down to its lowest level since its peak in October 2007.


A high volume of distressed transactions are weighing on price performance, Moody’s says. The New York-based ratings agency says the growing share of distressed deals is consistent with its observations from the commercial mortgage-backed securities (CMBS) market.

Given that it may take 12 to 24 months to foreclose on a property and execute an REO sale, there is a lag effect that results in fewer distressed transactions coming to market in the early stages of a downturn and an increased level in later stages, i.e. now, Moody’s director of CRE research, Tad Phillip, explained.

The agency’s property price index “continues to bounce along the bottom as a large share of distressed transactions preclude a meaningful recovery of overall market prices at this time,"" Philipp said. ""Indeed, the post peak low in price has been reached in the same period as a post peak high in distressed transactions has been recorded.""


Moody’s national index is now 47 percent below its October 2007 peak, but the agency’s analysts note that they’ve seen a pick-up recently in the number of deals trading hands overall. They see this development as a positive sign for the commercial real estate market as it sets the stage for recovery, however elusive that recovery may seem right now.

In March, there were 182 repeat-sales transactions totaling nearly $2.5 billion, a significant increase by both count and balance over February, according to Moody’s.

It was second highest number of repeat-sales transactions since 2008, bested only by that of December 2010, which benefitted from being the end of the year, when such business typically gets a seasonal lift.

According to Moody’s latest report, in March nearly one third of all repeat-sales transactions qualified as distressed.

In additional indices published this month, Moody’s quarterly national indices for the four property types all showed declines over the first three months of 2011. The industrial property sector recorded the largest decline at 7.7 percent, followed by office (7.1 percent), apartment/multifamily (4.7 percent), and retail (4.5 percent).

In a special ""From the Lab"" section of the report this month, Moody’s analysts examined the price performance of major assets in major markets â€" so-called trophy assets â€" with and without the inclusion of distressed exchanges.

Results suggest a trend of recovery in prices for these major assets and markets even when distressed transactions are included, as these assets and markets outperform the agency’s overall property price index.

""This is consistent with liquidity in the commercial real estate sector first returning to prime assets in capital-attracting cities,"" said Philipp.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.

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