There's been plenty of evidence of housing prices going down. There's also been a lot of talk that commercial real estate investment has slowed some this summer. But this is the first thing I've seen that says commercial real estate is actually declining in value right now.
The drop may not only spell the end of a five-year rally during which commercial real estate prices effectively doubled, but it also may signal that weakness in the housing market is spilling over into commercial real estate, said the MIT Center, which added that the last time that prices fell more than 2.5 percent was in the fourth quarter of 2001, when prices fell 3.9 percent following the terrorist attacks of 9/11.
The source is MIT Center for Real Estate and is based on an index the center created along with Moody's. It's one of several indices that has risen in the past couple years intended to help spread the use of commercial real estate derivatives in the U.S. The reading is based on returns on properties that traded during the third quarter in NCREIF's database. The index says values dropped 2.5 percent--the first recorded drop since 2003.
In related news, according to NREI online, the National Association of Realtors' chief economist said at a conference in Las Vegas that low cap rates are making investment in commercial real estate a riskier proposition and suggests the spillover of the housing credit crunch to commercial real estate.
“With the cap rates so low, people are questioning do you buy commercial property or buy a CD with a guaranteed 5% return, or an office property with a cap rate of 6.5%,” Yun says. “Because there is very little differential between CD returns and cap rates, there is a concern people may move away from investing in commercial properties.”
I blogged about the MIT index in January.