US Commercial Real Estate Prices Dip in Second Quarter
After, edging up 2.1 percent in the first quarter, transaction sale prices of commercial property sold by major institutional investors declined 2.7 percent overall in the second quarter of 2008 with prices for office properties declining 5.5 percent, according to an index produced by the MIT Center for Real Estate.
The office sector encountered the largest drop in the quarterly transaction-based index (TBI) in a single quarter since 1994, following minor declines in the past two quarters. The decline reduces office property prices to their early 2007 level.
The 2.7 percent decline in the overall quarterly TBI means that prices for properties such as shopping malls, apartment complexes, office buildings and warehouses are now more than 9 percent below peak values attained in mid-2007.
The down movement this quarter in the overall prices represents the third down quarter out of the last four quarters in the index. However, commercial properties, which produce regular income and serve as a major investment asset class, are generally in much better shape than housing.
The current declines are consistent with a previously reported widening disconnect between buyers and sellers. The MIT/CRE publishes not only the price index based on closed deals, which declined 2.7 percent, but also compiles indices that separately track movements on the demand side and the supply side of the property market.
The demand-side index tracks the changes in prices that potential buyers are willing to pay (sometimes called a “constant-liquidity” index of the market, because it tracks how much prices would have to change to keep a constant ability to sell as many properties at the same rate of trading volume). That index has now fallen steadily for all of the past four quarters, falling again in the second quarter by the same 2.7 percent as the realized price index. During the past four quarters, the cumulative decline in potential buyers’ prices is more than 17 percent versus their mid-2007 peak.
The supply side of the market — the property owners who are the potential sellers –matched the demand-side movement in the second quarter, also revising their willingness-to-sell prices downward by 2.7 percent, and this lock-step movement kept the overall sales volume tracked by the index nearly constant, at the historically low levels reached earlier in 2008.
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