Prof. Geltner asks “Why are you waiting?”

In his monthly column “Professor’s Comments“, Professor David Geltner noted the 2 year anniversary of Moody’s/REAL CPPI’s real peak, as the index fell for the 11th month in a row. The index now rests the same level it did on spring of 2003. Geltner commented:

“Through August the index is down 29% in 2009, 33% over the past 12 months, and close to 41% since that 192 value in October 2007. The current index level of 114 implies average market transaction prices in August 2009 at levels where they were in the spring of 2003.”

He proceeds to discuss the bifurcation in values between “distressed” and “healthy” commercial properties since the market peak. He notes that while the overall index is down 41% from its peak, “healthy” property values are down roughly 33%, while distressed properties are down 56%. For a better, visual description, see the chart below:

“…the side-by-side comparison over time of the healthy and distressed price indices allows a tracking of the history of the market bifurcation, which in turn provides a glimpse into the market’s underlying structure and dynamics. The indices comparison suggests that the separation began in earnest in early 2008, widened in the fall of 2008, and again in the spring of 2009. There is a hint (only a hint) that perhaps (just perhaps) the distressed property prices in particular may be bottoming out. We must always caution that a single month does not a trend make, but in August the distressed price index was nearly flat. This suggests that the vultures perched on the sidelines of the U.S. commercial property market might consider swinging into action.”

Geltner, along with many other market participants, expects distressed assets to continue to make up a large fraction of total sales volume in the coming months. Geltner notes that “[these transactions] could conceivably pull the overall CPPI down further, even without actually implying any further decline in the pricing of either distressed or healthy assets viewed separately.”

In other words, while the CPPI would continue to appear to drop, actual property prices (both distressed and healthy) may have already bottomed. Geltner’s viewpoint could prove to be valuable insight, as many investors remain on the sidelines and we all struggle to identify the market’s bottom.