More on Moody’s CPPI July Results

September 27th, 2011  ::  Posted by CRE Console

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.

6 Responses to “More on Moody’s CPPI July Results”

  1. Matt Stone says:

    RCA data and commentary clearly show a slowdown. The Moody’s/REAL CPPI data has a 63-day lag and so it’s less applicable to the current timeframe.

    Despite what major investors say in the marketplace – and considering their incentives for painting the market in a certain light – it’s still clear that deals are getting done, some of them at extremely rich pricing.

    RCA has sounded a note of caution and recast projections for 2011 year-end volume, but we also believe that an excess of gloom and doom talk does not serve the market. Clearly presented, accurate info does.

  2. CRE Console says:

    Matt, thank you for your comments. Certainly, RCA has noted a slowdown in transaction volume, most recently in your US Capital Trends report referenced in this article. Perhaps my closing comment was not stated in the most appropriate fashion and has been revised to better reflect its intent.

    I can see how the 63-day lag does not allow for a direct comparison between Moody’s CPPI for July and the drop in transaction volume for the months of July and August, but my statement was, “the ‘middle-market’ segment is reportedly the contributor to the price increase, I am not sure how long that trend will last”.

    It was never to question the accuracy of the data (there is no better source than RCA and Moody’s in my mind, that’s why I use it more consistently than any other source). The commentary was more about what September’s results may yield.

    If you feel I’ve inaccurately represented the data has stated, please let me know, as accuracy is a top priority for me.

    As it relates to excess doom and gloom, I 100% agree. There are many parties who look to take advantage of doom and gloom for profit (such as Bleu and Sternlicht).

    Because my observations are more anecdotal in nature, this blog serves more as a forum for conversation and discussion than an authoritative information source. The intent is not to spread doom and gloom, but instead provide a unique perspective to which our readers can voice their own opinion.

    Almost daily, clients ask what type of pricing and response rates sellers can expect on their listings. Being on the leading edge of the marketing process allows us to monitor certain indicators which won’t actually show up in Moody’s CPPI or RCA’s cap rate trends for 60 to 90 days. This allows CRE Console to provide a different, more forward-looking perspective, than any lagging or historical sale comp index can.

    Thanks again for stopping by and we look forward to hearing more of your thoughts.

  3. Joshua says:

    There is generally a seasonal shift in summer as well. Due simply to investors having kids and families that take vacation. I think all brokers have experienced this. I wonder how the 4th quarter looks (as reported in early 2012). I also think that there is a bit of tug of war that has finally happened. At first, Seller’s couldn’t get a bid. Then they could sell at the right price. Now there is pricing power is decent to high quality assets and distressed assets are starting to see bidding heat up a bit. Other than distress, it appears to me that typical deals are now having investors push back and seller’s hold firm on yields. I guess we will see wish side has more power in the 4th quarter.

  4. Basil says:

    Enjoy your blog. What are you using to publish the interactive charts? They are very dynamic.

  5. CRE Console says:

    Basil – we actually use Google’s charting APIs:

    There is actually a shortcut to use them through Google Docs, which is free to use if you have a gmail account!

    Let me know if you need any pointers.

  6. Basil says:

    Thanks for the tip. I figured out how to create the chart but am having some trouble publising it.

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