Friday, February 20, 2009

Commercial Property Values Fall Nationwide

Los Angeles South Bay WarehouseCommercial real estate prices in the U.S. dropped by almost 15% in 2008, more than home prices, with fourth-quarter depreciation the greatest in the national apartment market, Moody's Investors Service said Thursday.

The price decline eliminated the gains seen in 2006 and 2007 and returned values to 2005 levels, according to the Moody's/REAL commercial property price indexes. Prices fell 2.2% in December from November.

Commercial values are now down more than 16% from their peak in October 2007. The deepening recession is causing tenants to cut jobs and vacate space, bringing down building incomes, while the credit freeze is making it difficult to finance purchases.

Commercial real estate prices fell more than home prices last year.

Apartment prices fell 11.5% in the fourth quarter, according to Moody's. Even in the Western U.S., where prices held up better than the country as a whole, apartment prices fell 9% in the quarter and more than 16% for the year, Moody's said.

Los Angeles Warehouse With Cars
The fall in commercial property values is a lagging indicator to the general economy, suggesting the commercial market will have accelerated price declines going forward.

Renewal of leases on office and industrial properties will subside as employment and profits drop off. Those leases that are renewed will be at lower rates.

Other businesses will downsize, subleasing space, or leasing different properties at lower rates.

The retail sector will be hit hard by the double-whammy of horrendous sales at brick-and-mortar stores and increased online sales as consumers migrate to the Internet for their shopping.

Los Angeles Warehouse - Interior View
The multi-family sector is expected to hold up the best among the asset classes, as record home vacancies from foreclosed properties contribute to decreased vacancy rates in multi-family buildings.

However, rents are softening in many major metropolitan areas (Los Angeles and New York included), leading to declining returns for many multi-family investors.

An unanticipated side-effect of this miserable economy is that renters are moving in with family members or roommates (or sadly, onto the streets) as income drops – often unexpectedly and precipitously.

This has led to increased vacancies – and rental concessions on the part of many landlords.

Jamie Adner