Tuesday, August 05, 2008

Commercial Catastrophe?: MIT/CRE Commercial Property Index Q2 2008

There has been growing speculation and concern that the commercial real estate (CRE) markets will inevitably follow the lead of the residential markets down into a recessionary decline.

The notion of commercial real estate markets suffering a similar downturn as residential is both supported by historical correlations (e.g. residential and non-residential investment) as well as the logical outcome for a market that has seen similar levels of loose over-lending.

Fortunately, we need not speculate about the current state of CRE as the MIT Center for Real Estate tracks commercial property prices with a series of indexes that cover Apartment, Office, Industrial and Retail property types.

Notice in the top aggregate chart, after having some substantial growth between 2003 and Q2 2007 (particularly during 2005 – 2006), there appears to be a pullback of sorts that started to form during the second half of 2007 leaving prices now 9.25% below the high seen in Q2 2007.

Furthermore, in Q2 2008 the Industrial and Retail components continue to show significant peak declines of 14.90% and 6.87% respectively while the Office component grew by 5.51% on a year-over-year basis.

Looking at the supply and demand indices of the Retail component appears to shed some light on the factors now working to drive prices lower for that market.

Notice that while supply of retail properties have increased substantially in recent years, demand while remaining largely flat since 2005 has now started to decline precipitously.

It will likely take another 2-3 quarters to get a firm picture of what exactly is occurring in the nation’s commercial real estate market but the latest MIT/CRE seems to be suggesting further weakness ahead.