Commercial Property Prices Dropped in January, Moody’s Says

U.S. commercial property prices slipped for the second straight month in January, as distressed real estate sales weighed on values, according to Moody’s Investors Service.

The Moody’s/REAL Commercial Property Price Index slumped 1.2 percent from the previous month and 4.3 percent from a year earlier. It’s up 4.2 percent from an eight-year low in August, Moody’s said in a statement today.

The U.S. economy grew at a 2.8 percent annual rate in the fourth quarter, helping boost demand for office, retail and industrial space and apartments. Price increases are being held back by the number of distressed properties on the market, said Christopher Cornell, an economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

“Choppiness in the CPPI is starting to subside as the bottoming process” that started in the fourth quarter of 2009 continues, Tad Philipp, director of commercial real estate research at Moody’s, said in the statement. “However, some choppiness will remain as the share of distressed transactions continues to be elevated.”

During the commercial real estate boom, many investors bought property with high levels of debt. The recession led to rising vacancies and falling values, making it difficult for landlords to refinance. The delinquency rate on loans packaged and sold in commercial mortgage-backed securities rose to a record 9.2 percent in February, according to a March 15 report by Moody’s.

‘Slack in Supply’

“Most demand drivers for commercial real estate have reached bottom, including office-using employment,” Cornell said in a telephone interview before the report was issued. “The underlying demand for commercial real estate has begun its turnaround, but you’re not going to see much price appreciation until the slack in supply is taken up.”

Investors are becoming more confident about buying commercial property as the economy grows, according to a survey conducted by PricewaterhouseCoopers LLP’s New York-based unit.

“Signs of recovery are boosting optimism among owners and buyers for 2011,” said the report released yesterday. “The pace at which the U.S. economy is improving, however, has been slow and uneven at best.”

Investment-Grade Properties

Prices for investment-grade properties in the U.S. fell 1.1 percent in January from the previous month, CoStar Group Inc., a real estate data service based in Washington, said March 9. Values were up 11 percent from January 2010 and down 33 percent from the peak in June 2007, according to the company.

CoStar, unlike Moody’s, tracks transactions of less than $2.5 million. CoStar also limits its index to class A and B offices, the highest-quality buildings; retail and industrial properties built since 1990; and multifamily buildings of 30 units or more.

Commercial property values rose 1 percent in February compared with the previous month and 20 percent from a year earlier, Green Street Advisors, a real estate research company in Newport Beach, California, said March 4. Prices are down 17 percent from the August 2007 peak.

Green Street’s index includes deals that are in negotiation or under contract, while Moody’s tracks completed sales.

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