US commercial property sales to fall 70%

Source : Business Times - 27 Nov 2008

Value of such deals will slump to US$142b this year, says research firm

The value of US commercial real estate sales this year will fall to US$142 billion, 70 per cent less than last year’s record US$467 billion, as the economy slows and borrowing costs rise, according to Reis Inc, a New York-based real estate research firm.

Office, apartment, retail and industrial property transactions totalled US$110 billion through the third quarter, Reis said in its capital markets survey. Sales are slowing as 2008 draws to a close, likely resulting in a yearly total of less than the implied annual rate of US$147 billion if the pace through nine months were to continue, said Reis chief economist Sam Chandan.

‘The credit crisis has proven recalcitrant and has spilled over to the real economy,’ Mr Chandan said on a conference call on Tuesday.

Property values fell as the global credit crunch caused financing to become scarce and boosted borrowing costs. Office building prices declined 15.4 per cent in the third quarter from their peak, and were down 1.8 per cent from the second quarter, Reis said. Apartments declined 17 per cent from the high and fell 3.7 per cent from the second quarter.

Retail property prices dropped 7.3 per cent from the peak and 0.8 per cent from the second quarter. Industrial properties such as warehouses fell 10.6 per cent from the high and 2 per cent from the prior quarter, Reis noted.

Commercial mortgage delinquency and default rates will increase in 2009, said Mr Chandan. The recession will result in rents and occupancy ‘differing significantly from expectations in underwriting in 2006 and early 2007′ when landlords took out loans for the properties, Chandan said.

While commercial mortgage delinquency rates ‘are on a par with the residential sector’ and defaults remain low, ‘the performance of properties will be insufficient to cover debt service and escrows are being drawn down’ as a result, Mr Chandan explained. ‘As those gaps increase and escrows begin to evaporate, the potential for distress increases in markets across the country.’

As the end of this year approaches, demand to refinance loans will rise, Mr Chandan predicted. ‘We expect an imbalance will emerge between demand for refinancing and availability if new sources don’t emerge over the next year,’ he said.

‘We’re in the middle of deleveraging,’ he added. ‘That has the potential to depress values below’ what properties generate in rental income.