Retail Spaces Lead Drop in U.S. Commercial Property

U.S. commercial real estate prices fell the most in almost a year in June as the economic recovery showed signs of faltering, Moody’s Investors Service said.

The Moody’s/REAL Commercial Property Price Index dropped 4 percent from May, the company said today in a report. The decline was the biggest since July 2009, and pushed the gauge down 0.9 percent from the start of the year.

“We expect property prices to remain choppy for some time as commercial real estate markets and the broader economy continue their slow recovery from the recession,” Moody’s researchers said in the report.

High unemployment and concern over slowing economic growth are hampering a price rebound for offices, apartments, industrial and retail properties, Moody’s said. U.S. gross domestic product expanded at a estimated 2.4 percent annual pace in the second quarter, less than economists forecast and slower than the 3.7 percent rate in the previous three months.

The Moody’s index is down 41 percent from its 2007 peak, having gained 4.2 percent from the seven-year low set in October.

The value of malls and shopping centers fell almost 11 percent in the second quarter, the biggest drop of any commercial property type tracked in the Moody’s index. Apartments and offices values both gained about 4 percent, while industrial properties dropped 2.9 percent.

“In the first quarter, there was probably a little more optimism because we had evidence of retail sales rebounding to a level that was probably a little better than people expected,” said James Sullivan, a Cowen & Co. real estate investment trust analyst. “In the second quarter, things began to slow down.”

Sullivan rates mall operator Simon Property Group Inc. (SPG) “outperform” and competitors Macerich Co. and Developers Diversified Realty both “neutral.”

Retail sales in the U.S. trailed forecasts and consumer confidence was near an eight-month low, government and university reports said on Aug. 13.

Moody’s measures overall commercial property values on a monthly basis and breaks the numbers down by property type once each quarter. The index measures the changes based on repeat sales transactions.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net; David M. Levitt in New York at dlevitt@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net.

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