Wednesday, March 24, 2010

Commercial Real Estate Bottoming?

Commercial real estate prices rose for the third straight month, bouncing from an epic collapse, on lower volume (less transactions), but higher dollar volume.

Before we jump into the details, as Calculated Risk notes:

Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices.
The below two charts (index level and year over year change), both show what appears to be a bottoming in the commercial real estate market.

Year over Year Change

So have we hit a bottom? For the time being... possibly. But longer term, I am not so sure in nominal terms and even less confident in real terms.

Lets put the current price level in perspective. We have come a LONG way (down 44% from peak to current trough), but price levels are now just slightly below the level seen in January 2001 (in real terms). What's different now than then?
  • Less demand (3,000,000 less people employed and office vacancy rates at 18% [up from 8%] in 2001)
  • Significantly more supply (anyone have a source for square footage?)
  • Less credit available for purchases
Source: MIT & EconomicPic Data

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