Are commercial real estate prices about to falter, especially the healthy apartment building market?
According to a new report from Moody’s, apartment prices fell 0.6% in April from the month prior, continuing what the rating agency called “a trend of weak performance.”
“Property price increases over the past year have been driven by major markets,” said Keerthi Raghavan, a Barclays’ analyst. “These markets are already at fairly high levels and price increases here have slowed down.”
Moody’s noted that improvements in the apartment market have dissipated in recent months after the index soared to roughly 140. Prices on office properties also “fell marginally,” the firm said.
Moody’s tracks prices through its Real Capital Analytics Commercial Property Price index, which measures value changes based on repeat sales.
The April RCA CPPI index declines were driven by unexpected price declines in apartment buildings, which had “recovered the most” from the bottom in CRE prices reached in late 2009, the firm said.
Retail and industrial properties on the other hand continue to improve in April albeit at a slower pace.
Healthy properties in major markets such as Boston, Chicago, Los Angeles, New York, San Francisco and Washington have recovered to 91% of their peak levels.
A less expected finding is that over the past 18 months distressed properties in major markets have recovered alongside performing properties. As a result, the average distressed discount was reduced from 32% in mid-2011 to 22% this year.
Performance, however, can vary. Prices of distressed properties in nonmajor markets continued to decline despite improvements in performing property sale prices.
“Macro uncertainty has kept prices on nonmajor markets from increasing rapidly. Major and nonmajor markets have disconnected quite a bit,” Raghavan said.
“This sustained downturn in distressed properties in weaker geographies” is likely to result in continued elevated severities on commercial mortgage-backed security liquidations.
