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Commercial Properties In Decline, But Market May Have Cushion
By James Comtois
For the third month in a row, Moody's Investors Service's Real Commercial Property Index saw a decline. Despite this, Moody's asserts that there are some factors that might prevent the market from going too soft.
Moody's/Real CPPI declined in January 2008 from the previous month by 0.6%. The index is now approximately 2.4% below the peak of October 2007.
Although the aggregate Moody's/Real CPPI has fallen off from the peak months prior, some impressions would suggest even steeper price drops in the last few months than the index has actually registered. A few factors might be having some lingering impact on transactions and temporarily prop prices up, delaying full price recognition.
Moody's report points out that sales that are actually occurring are disproportionately among the winners, as the losers languish without funding. Also, most commercial mortgage-backed securities loans are assumable and when new borrowers can assume existing loans, the net effect is to bolster value. Existing loans with favorable coupons, loan terms and leverage have value.
According to Moody's report, the terms of a commercial real estate sale are often determined 30, 60 or 90 days in advance of the actual closing. Completed transactions that are recorded inherently reflect the credit environment of a few months earlier.
Some themes Moody's has noted in its latest report include the fact that several market factors might be slowing down the recognition of falling prices. The repeat sales that are executed could represent the winners of the market and assumable CMBS loans inherently hold on to value driven by financing.
In the east, apartments and retail continue to outperform their national aggregate counterparts. In the south, however, the apartment sector is languishing even more than at the national level, pulled down in particular by Florida. Southern California retains its momentum as all four major property types saw increases by more than the nation.
Additionally, of the three major office markets for which a sub-index can be calculated, growth in Washington, D.C. is cooling. San Francisco matches New York in price growth but is experiencing some slowdown in transaction activity.
Both prices and volume remain hearty in New York.
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