Commercial Real Estate Prices Up 2% in First Quarter
There were signs of improvement in the commercial real estate market in the first quarter as sales prices rose slightly, though demand continued to decline, according to MIT’s Transaction Based Index.
Results for the 1st quarter of 2008 show a 2.1% capital return for the properties sold in the National Council of Real Estate Investment Fiduciaries database, MIT said.
The demand-side index continued to fall, by 4.6 percent, which is the third straight quarterly drop, for a cumulative decline of more than 14 percent versus the mid-2007 peak.
However, the supply side of the market raised its reservation prices by 9.2 percent in the first quarter.
The NCREIF Property Index (NPI) showed a total return of 1.6% in the first quarter, comprised of 1.26 percent income and 0.3 percent capital appreciation.
Standard & Poor’s says the slowing of commercial real estate lending among regional banks may be problematic for some financial institutions’ performance, but is unlikely to result in widespread rating actions on those with the highest exposures.
In a new report, Cracks Are Emerging In Commercial Real Estate For U.S. Banks, S&P says it believes that “certain issuers concentrated in builder-related segments with certain geographic and loan exposures could see negative ratings actions depending on credit quality losses and their profitability outlook.”
We expect that credit quality within most CRE segments will remain sound, with the exception of construction, which has shown considerable credit deterioration in recent quarters.
Residential construction and development loans are currently experiencing a significant downturn, in particular in markets where home price appreciation outpaced the industry, such as Florida, Georgia, Arizona, Nevada, and California, according to the report. While nonperforming asset levels and net charge-offs have increased, they are off a low base. As banks increase their loan-loss provisions to build reserves for potential losses, however, earnings are diminishing for CRE lending.
CRE segments, such as retail or hospitality, will likely weaken in the face of low consumer spending, but Standard & Poor’s doesn’t expect credit losses to outpace its expectations for a normal cyclical downturn. Overall, it expects CRE valuations to decline from elevated levels during the next two years because of a difficult financing landscape and economic weakness.
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