Moody’s reported that its Commercial Property Price Index (CPPI) was up 5% in July and that most of the increase was due to middle market asset pricing:
As in June, the broad middle market (non-major assets and non-distressed assets) drove the bulk of the overall increase of 5.0% in the July CPPI. Middle market transactions have accounted for approximately 60% of volume in recent months.
Distressed asset sales accounted for 27.6 percent of the overall sales volume, with the distressed index inching up 2.6 percent.
While the “middle-market” segment is reportedly the contributor to the price increase, I am not sure how long that trend will last, as m-o-m transaction volume has fallen off a cliff.
Real Capital Analytics recently reported on the slow in transaction volume for the month of August:
Sales of significant commercial property totaled $13.1b in August representing a 13% year-over-year gain. While still positive, the rate of growth represents further slowing following rather modest increases recorded in July. Both months were well below the over 100% gains experienced in the first half of the year.
Despite the recent loss of momentum in transaction volume, prices appear to be holding firm with cap rates stable across all property types and industrial exhibiting a downward trend. The Moody’s/REAL Commercial Property Price Index also echoes the stagnation in prices with the latest release showing that nationally, prices have fluctuated around the same levels for the past two years.
What they don’t say is that $13.1 billion volume in August is tepid at best. Consider June 2011 – volume was approximately $23 billion. In July and now August, it was sub-$15B. So, while y-o-y year sales volume is only down 13 percent, it is down nearly 45 percent since the June peak.
Market activity and investor interest feels like it has come to a screeching halt. It will be interesting how this drop in transaction volume will impact the CPPI. In its latest report, Moody’s did note:
Price increases in the near term are likely to be earned the old fashioned way, by rent growth, rather than through higher leverage or financial engineering. Continued economic uncertainty will take a toll on the assumptions utilized by buyers in making their investment decisions. Slow job growth will crimp expectations for the absorption of vacant space and for rent increases, which in turn will constrain near term price increases.
[Moody's/REAL September Report]
September 27, 2011 4:30pm
Just read this article on Bloomberg, wherein both Jeff Blau and Barry Sternlicht say they’ve seen a similar slowdown:
“In the last 60 days, it really slowed down,” Related Cos. President Jeff Blau said at the conference. “People are throwing term sheets around but they’re not closing deals.”
Real estate investors are concerned the U.S. economy may enter another slump, said Barry Sternlicht, chairman and CEO of Starwood Capital Group LLC[...]
September 27, 2011 7:48pm
Updated as noted in the comments below.