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Commercial Property Pricing Rises in November - 01/21/10
Commercial property pricing rose in November for the first time since December 2008, according to the Moody's/Real Commercial Property Price Indices, or CPPI.

The 1% hike in November also follows six months in which the pace of price declines steadily moderated after an 8.6% drop in April, according to the all-property component of CPPI. CPPI is a collaboration of Moody's Investors Service and Real Estate Analytics that tracks repeat sales of properties.

Moody's analysts say the recent results indicate that pricing may finally be headed toward stabilization, after being unsettled and declining since late 2007. But they warned that more monthly price declines lie ahead.

"The free fall in pricing from early 2009 has stopped and we are seeing moderating, but the drop will not end on a dime. There will be a period of price discovery," said Connie Petruzziello, a Moody's analyst. "There will be choppiness in pricing as they go up, like the choppiness we saw at the end of 2007 and in early 2008 when prices started going down."

For example, after peaking in October 2007, the CPPI dropped 2.4% through January 2008. But it then rebounded by 2.1% the following February before dropping again a month later.

The indices' all-property component measurement of 109.1 in November was down 33.5% from a year ago and 43.1% from its peak in October 2007.

The volume of deals in November dropped to 362 with a combined value of $4.1 billion compared to October's 407 deals with a combined value of $5.4 billion. October saw the highest monthly volume for all of 2009. Those numbers reflect all commercial property transactions and not just the repeat sales used to calculate the CPPI.

Moody's expects price drops in the months ahead to be far less steep than those in early 2009 and 2008. It said continued drops will be driven by weak property fundamentals, which include declining rents and rising vacancy rates for all property sectors.

The office sector led the declines last year when its national vacancy rate increased 2.5 percentage points to 17% and its average asking rent dropped 4.7% to $27.80/sf, according to Reis Inc.

In the multifamily sector, the New York research firm said that the vacancy rate increased 1.3 percentage points to 8% and the average asking rent dropped 2.3% to $1,026/unit.

Meanwhile, the vacancy rate for retail shopping centers rose 1.7 percentage points to 10.6%. Its average rent dropped 2% to $19.13/sf.

"Buyers will continue to require higher capitalization rates because of the riskiness of assets being sold," Petruzziello noted.

Analysts at Moody's expect multifamily to lead property sectors in a recovery in prices because their fundamentals will be the first to strengthen. They noted that multifamily's one-year lease terms will enable landlords to more quickly raise rents when demand increases during an economic recovery.

Tenants in other sectors typically have multi-year leases. Moreover, many have been renewing for longer terms to lock in rental rates that have fallen because of decreased demand during the economic downturn of the past two years.

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