The Financial Times reports that commercial real estate sales in the US have fallen dramatically, due to uncertainty about financing, vacancy, and defaults. It isn’t yet clear what the price impact will be once sales pick up again, although experts believe that the decline will be less than that of the housing market.
From the Financial Times:
US office property sales fell by the largest amount since the September 11 2001 terror attacks in the final three months of last year, raising fears that commercial real estate is heading for a meltdown.
Commercial property in general, and offices in particular, are coming off a boom period, when prices and rents set records last year.
However, far fewer deals have been closed since August, when the credit squeeze essentially shut down the market for commercial mortgage-backed securities and made borrowing more expensive.
The volume of office space sold in the final quarter of 2007 fell 42 per cent to $26.5bn, compared with the same period in 2006, according to data released on Friday by Real Capital Analytics, a real estate data company. Sales of property portfolios fell to $5bn, after logging $105bn in the first three quarters.
“What’s happening now is a capital markets event,” said Dan Fasulo, managing director at RCA.
Spreads on CMBX, an index that tracks commercial mortgage backed securities, have recently suggested that default rates are expected to reach three times historical levels. But analysts say commercial property is not expected to suffer the same slump as housing because it has not experienced such high levels of overbuilding.
However, if the US economy experiences a deep recession, commercial property is considered to be at risk. Demand for space is largely driven by the health of the business environment.
“The wildcard is whether or not the US falls into a recession. What’s causing the market to hold up is the high level of occupancy and high level of rent,” said Mr Fasulo. “Unless [there is a recession] you are not going to see a [major] deterioration.”
The collapse in property transactions was not limited to office real estate. In retail property, volumes of sales fell by 30.1 per cent to $10.1bn and industrial real estate saw a 22 per cent drop in sales to $26.5bn.
Excluding the $22bn acquisition of Archstone-Smith – the second largest US apartment owner – by Tishman Speyer and Lehman Brothers, sales of retail property were down 60 per cent.
Lower sales were spurred by tighter credit conditions meaning that buyers could raise less cash to pay for property and expected lower prices.
“There was a disconnect between buyers and sellers and that drove sales lower,” said Dan Fasulo, managing director at RCA.
The drop in office property sales in the last quarter did not stop the full year 2007 seeing a 55 per cent jump in sales volumes to a record $211bn.
Office property prices in central business areas of cities are 10 per cent lower in the last quarter from their peak levels in the first quarter. RCA expects prices for all types of property to fall another 5 to 10 per cent this year.
…although experts believe that the decline will be less than that of the housing market.
Yeah, “experts”. They could not possible know yet, because we have yet to see the bottom of the housing decline — not nearly so. Due to the wider effects of that — I think we can all get a laugh now out of all the earler talk of ‘containment’ — you have to believe that CRE will talk housing down. How far down is still an open question.
possible should be possibly
talk should be track
“But analysts say commercial property is not expected to suffer the same slump as housing because it has not experienced such high levels of overbuilding.”
Weird thought. Traditionally, commercial property has had wider (wilder?) swings than residential.
I work in commercial real estate in primarily the Dallas/Fort Worth market. In this market, generally speaking, commercial product has remained under control in terms of new construction. The capital market over the past ten years has helped keep the new construction to a manageable level. The DFW new home construction has showed signs of slowing for several years now. Dallas is in a unique position – central time zone, good labor force, DFW International Airport, good housing, etc. There are a significant number of companies looking at the DFW area to relocate. As companies relocate, most other segments fall in line; i.e., office space is leased, homes are sold, etc. Those are some of the factors that have sustained commercial construction in this market. We have several new office buildings under construction with a good velocity of interest from prospective tenants. Investment buyers have shown continued interest and the prices are holding steady. I know some markets are experiencing a more significant reduction in pricing; but, not DFW, not yet.
Thanks for the input. Real estate is always local, and the national trends don’t manifest themselves everywhere.
The CMBS market is dead. Literally. People I know in the business say they know of only a handful of CMBS originations so far this year.
In 2006 CMBS represented 70% of all commercial real estate lending.
If you look at CMBS spreads via the CMBX index, it’s not a pretty picture.
As the RCA guy points out in the article, this repricing is solely due to cost of capital.
When fundamentals (ie cash flow) turn down as a result of the oncoming economic slowdown, then CRE will really start to go down…