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Thursday, March 28, 2024

Moody’s Reports That February Commercial Real Estate Prices Are Again Heading Lower

Courtesy of Tyler Durden

In the rush over Goldman coverage and volcanic news, a very relevant piece of market update may have gotten lost, namely that Moody’s/REAL All Property Type Aggregate Index just peaked once again. Moody’s reports that this index “measured a 2.6% price decline in commercial properties in February. This decrease comes on the heels of three consecutive months of rising prices, and brings the level of commercial property prices 41.8% below the peak measured in October 2007. Values are now down 25.8% from a year ago, and 41.6% from two years ago.” This is the first time prices have fallen since October of last year: have we just hit price resistance in CRE?

The chart below shows the month over month change in prices.

A useful observation from Moody’s: “The share of distressed sales in the repeat-sales transaction database has increased significantly over the last year. In early 2009, less than 20% of repeat-sales were identified as distressed.  In February of this year, that proportion reached nearly one-third.”

Moody’s provides this explanation for why prices have plateaued:

The price increases which began in November 2009 may have been due in part to the bifurcation of the market between high and low quality properties. While interest in high quality properties appears to be picking up, transaction activity in the core of the commercial real estate market remains muted. Also, it is interesting to note that distressed sales dipped in the three months that showed an increase in prices, and this month’s jump in distressed sales to the highest level in over three years no doubt contributed to the current price decline. The high-low split in the market, together with the effect of distressed sales on overall price levels, will likely cause markets to bounce up and down over the near term. We do not expect prices to establish a clear trend until volume picks up and market-clearing prices are established for distressed properties.

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