While final numbers on the value changes in the national commercial real estate market during the fourth quarter are not yet in, MIT has released an important study on the subject. The Transaction-Based Index follows the values of the nation’s major pension funds’ Commercial Real Estate holdings.
In the third quarter of 2007, MIT reported that values declined 2%. During the fourth quarter, this trend accelerated to 5%.
The director of the MIT center that conducted the study, David Geltner, claims that “This is evidence that the commercial property market continued to fall, and at an accelerated rate, through the last quarter of 2007, no doubt due to the effects of the credit crunch.” A survey by the Federal Reserve, however, recently found that it was the opinion of many bank executives that the declining macroeconomic situation has also played a primary role in the falling value of the national commercial real estate market.
While the numbers do indeed seem to be bordering on dire, it is also a possibility that a very natural correction is taking place: From 2004 until the end of the first half of 2007, the value of pension fund commercial real estate holdings grew a truly astounding 72%.
Certainly, according to the study’s authors, a correction of some sort has been rendered necessary recently due to the “very aggressive commercial mortgage underwriting practices.”
That being said, total returns on commercial real estate holdings during 2007 were just 3.7%, which merely kept steady with operating costs. This number was the worst annual number recorded since 1992. During the early nineties, of course, commercial real estate experienced its greatest crash since the Great Depression.
The study’s directors, however, emphasize that market fundamentals are considerably stronger than they were in 1992. Specifically, the level of over-building is considerably lower these days than it was during the early nineties.
Though, as a counter-argument to that, it could be said that the lending institutions heavily involved with real estate markets in general are in a far worse position now than they were in 1992. Similarly, 1992 was towards the tail end of negative macroeconomic activity, whereas we currently seem to be entering a new recession.
At least in the United States, commercial real estate has historically shown a particularly strong correlation to the greater macroeconomic situation.
So, at this time, significant worry about the long term health of the national commercial real estate market does not seem inappropriate. However, the specific numbers are currently too limited to firmly say one way or the other whether or not the second half of 2007 saw the start of a serious decline in the value of commercial real estate, or the tail end of a benign correction.
While the MIT study looked at just commercial real estate investments by pension funds and similar institutional investors, a second index – also developed by MIT, but published by Moody’s – analyzes the broader commercial real estate market, and will be published in the coming weeks.
