Thursday, June 9, 2011

Is US Commercial Real Estate Sinking To New Lows Or Zooming Towards Its Old Peak?

Amazingly enough, the two leading indices of commercial real estate (CRE) in the US are completely at odds regarding this. Broadly based Moody's Investors Service that tracks closing prices of a broad base of CRE finds that as of the end of March average CRE prices were 47% below their peak observed in October, 2007 and still sinking,'s-commercial-real-estate-prices.html .

OTOH, Green Street Advisors who track reported prices of a subset of CRE that is owned by 80 leading REITs find that after peaking in mid-2007, CRE declined to a low point at 60% of that level in November, 2009, when it turned around and is now at 90% of the peak level and readily rising, . The data from this source has led some to even declare that the wonderful performance of the supposedly more free market CRE compared to the ongoing slump in residential real estate shows how government interventions in housing markets have been the source of all our problems, .

So, what is up? As far back as 10/27/10, Alex Finkelstein at World Property Channel discussed what was already a large divergence between these two at . In this he interviewed the directors of research at the two outfits and got the following.

From Mike Kirby at Green Street Advisors, the optimistic firm, he got "Yes, it's subjective" in terms of their approach, which focuses on large individual transactions. Kirby went on to quote Keynes: "We would rather be roughly right rather than precisely wrong," as he supported the idea that by then CRE had already been rising for nearly a year.

From Michael Gerdes of Moody's he got "We are trying to capture the entire market, not just a subset of institutional quality assets."

A bottom line would appear to be that there is a massive divergence within commercial real estate. There are certain regions and sectors where "high quality" CRE is booming, and these are the items that stock the portfolios of the recently rising REITs. However, the larger mass of CRE in the majority of the economy is doing just the opposite and tracking the housing market, if with some lags: down and still falling with no clear bottom in sight.


TheTrucker said...

In 1998 I thought commercial real estate was over and done. With video conferencing there is little or no reason for the commute. But the NEED of the people on the top floor to be floating over the office workers is just to extreme. The NEED of the "shopper" to "feel" the fabric in that easy chair and to be surrounded by fountains and greenery while having that "shopping" experience seems to trump rationality. I say all this but I too go to the grocery store and the Home Depot.

But imagine one room of your home in the burbs set up to look just like your office at work, and all the people with which you normally conduct business using similar accoutrement. One huge carbon reduction.

But the rentier (commercial real estate) and the oil folk (yes... income from oil "ownership" is rent) would loose the rent. That is what is propping up commercial real estate.

Daro said...

Or this is part of the trend where the market has abandoned the non-wealthy as customers and has retooled itself simply to provide for the elite. I've been maintaining for years that America is turning into the Thailand economy: rows of shops selling Hermes and Prada beneath a cluster of gleaming office towers with 95% of the peons relegated to sitting in dimly lit squalor waiting for the crook of a finger from their "betters" if they ever need to draw on the pool of labour.

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Jacoblrishly said...

A basal band would arise to be that there is a massive alteration aural bartering ral estate. There are assertive regions and sectors area "high quality" CRE is booming.

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