Are Record Declines in Commercial RE Actually Good News?


This piece, first published on various real estate and financial blogs in the summer of ’09, is obviously dated, but it demonstrates a fluid and highly readable writing style, a high degree of professionalism, and an authoritative tone. A reader might not believe that recovery was around the corner (which it was!) but would be sure to conclude that the writer knew his stuff. This is critical in the financial services industry where credibility is everything.

Commercial Real Estate; Record Declines May Be Good News                                                          by Glenn Fydenkevez

A key commercial real estate price index developed by the Massachusetts Institute of Technology Center for Real Estate (MIT/CRE) posted a staggering 18.1% drop in the second quarter of this year. The index, which collects commercial real estate purchase and sales data from leading real estate firms, is now down 22% for the year, and 39% from its peak in Q2 ‘07. The information was released by MIT/CRE Monday to the dismay of commercial property investors nationwide.
These numbers do not bode well for owners of income producing buildings seeking to refinance. Shrinking valuations will make it harder for buildings to qualify for institutional financing in this tight credit environment. Banks have significantly decreased their loan-to-value ratios (LTV) as a result of the credit squeeze and the unpredictable markets. The combination of tighter lending criteria and lower appraisals will result in a large number of buildings becoming ineligible for refinance.
This is a trillion-dollar problem, and the government can offer only nominal assistance; the public has no appetite for bail-outs. The situation is dire, indeed. 
All the bad news, however, is a harbinger of good news to come. The best financial professionals know that pessimism is a bullish indicator. A market bottom, by definition, is the moment of maximum pessimism.
The sheer magnitude and incredible speed of recent price declines could be an indication that sellers have capitulated. They now seem to believe that getting out is more important than getting their asking price. 
It is worth noting that the 18.1% drop reported by MIT/CRE is the steepest in the 25-year history of the index, and that the peak-to-trough decline of 39% is considerably worse than the 27% decrease reported during the last great commercial real estate meltdown in the 1980s. Further, the commercial property collapse has now eclipsed the downturn in residential real estate which is off 30 percent from its highs. The best bad news of all, however, is that the supply side index of prices sellers would be willing to accept plummeted 18.5% to a new record low. Who could be blamed for considering that number a white flag of surrender?
Predicting a bottom is a fool’s errand, but it would be equally foolish to not anticipate the recovery that’s coming. Hidden and overshadowed by all the bad news in the report is the fact that sales of commercial real estate actually picked up over the last 3 months. Transaction volume showed a nice increase in the 2nd quarter, the first up-tick in nearly 14 months.
I don’t know precisely when the turnaround will happen, but I do know that a predominantly bearish sentiment is a bullish indicator, and that counterintuitive doesn’t mean wrong.


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