Fewer Distressed Sales Give Boost to Commercial Property Prices

Commercial real estate prices in the U.S. rose 2.4 percent between July and August, ""Moody's Investors Service"":http://www.moodys.com reported Monday.

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That monthly boost pushes Moody's index reading 15.3 percent above this cycle's low set in April 2011. Although the agency's Commercial Property Price Index (CPPI) has risen in each of the last four months, it remains close to its two-year average.

Much of the improvement in August came from a reduction in the share of distressed deals changing hands, which were 21.7 percent of the repeat transactions that the CPPI measures. That's down 5.9 percent from July and is the lowest distressed reading since January of 2010.

Moody's latest report shows prices for distressed transactions were down by 3.5 percent from July and were only 6.9 percent above the post-peak low set in August 2010.

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Looking ahead, Moody's says it does not envision significant price increases over the next year.

While distressed sales may have hit their high-water mark for this cycle, Tad Philipp, Moody's director of commercial real estate research, says commercial mortgage-backed securities (CMBS) spreads have widened significantly in recent months, affecting the price and availability of a key source of debt for property acquisitions.

""We think CMBS loan origination, which would help support acquisition pricing, will decline,"" Philipp said.

A healthy CMBS market is critical for a broad-based and sustainable commercial property price recovery, according to Moody's.

Looking at major assets in major markets, Moody's CPPI finds prices rising 0.8 percent in August. While 33 percent above their January 2010 trough, the price growth for major assets in major markets has largely cooled off over the past year.

Transaction volume remained high in August at 207 repeat sales. The average monthly transaction count for 2011 to date is 185, as compared with 144 during 2010 and 96 during 2009.

Moody's CPPI is based on the repeat sales of the same properties throughout the United States at different points in time.

The company says applying price changes measured in this way circumvents the distortions that can occur with commercial property value measurements such as appraisals or average prices.