Price Gains Underscore Market’s Volatility

NEW YORK CITY-On the face of it, the gains in commercial property prices reported earlier this month by Moody’s Investors Service for September and Real Capital Analytics for October look like good news. In particular, the Moody’s/REAL Commercial Property Price Indices increased 4.3% in September, the largest gain in the history of the CPPI. However, the previous month’s report, which said that commercial property prices slipped to their lowest level in 10 months, underscores the market’s continuing volatility.

“Each of the summer months this year recorded declines in the 3% to 4% range, followed by this month’s sizeable uptick,” says Nick Levidy, managing director at Moody’s, in a release. “The relatively large swings seen in the index recently are due in part to the uncertain macroeconomic environment and the effects of a thin market with low transaction volumes.” 

In a commentary on the latest results, David Geltner, a leader of the MIT team that developed the methodology for the Moody’s/REAL indices in 2006, “This type of extreme volatility probably largely reflects what is actually going on in the US commercial property market, as asset markets typically display greater volatility during periods of fundamental uncertainty, rapid economic and institutional or political change, and transition in the markets.” He notes that the domestic market remains “deeply trifurcated” among trophy assets, distressed situations and the bulk of the market, which is neither trophy nor distressed.

The national property type indices, which are quarterly, had mixed results. Two of the four major property types recorded gains in the third quarter while two showed declines. Gaining were retail, which went up 5.7% in the quarter, and apartments, which rose 0.4%. Office properties saw a 3.8% decline in prices and industrial prices dropped 4.3%.

In the top 10 MSAs, which typically account for 50% to 80% of the transactions of the national property type indices, apartment prices fell 4.2% in Q3 while industrial prices took a hit of 9.9%. Retail in the top 10 MSAs posted the best performance with a quarterly return of 9.8%. Coming up behind retail were office prices, which gained 9.4%.

In September there were 153 repeat-sale transactions. Dollar volume of the repeat-sale transactions jumped to $3.7 billion, compared to $1.85 billion in August. The largest transaction to close during the month was a $208-million deal for Union Bank Plaza, a 627,000-square-foot office building in Los Angeles, according to RCA.

As of the end of September, prices are up 0.3% from a year ago but down 36.8% from two years ago. They are now 42.7% below the peak value reached in October 2007, according to Moody’s. The CPPI reports are prepared for Moody’s by Real Estate Analytics, using RCA data.

RCA’s report for October finds that transaction volume grew 5.9% from September to reach $12.5 billion. The property data firm notes that activity for the month was boosted by the emergence of Extended Stay Hotels from bankruptcy, thanks to a $3.9-billion acquisition by a group led by Centerbridge Partners.

The Extended Stay deal “offset volume declines in all other property sectors except retail highlighting the increasing weight carried by large deals—whether single-asset, portfolio or entity-level—in shaping transaction volume trends,” according to RCA. “While monthly changes in closing volumes may appear choppy across property types, $7.1 billion of deals in contract offer a clear indication that the market is on course toward a strong finish for 2010.”