Magazine article Mortgage Banking

All over the Map: Prices Paid for Commercial Real Estate Currently Range All over the Board. Trophy Office Buildings in Top-Tier Cities Are Netting Record Prices, While Distressed Properties Can't Find Buyers. Yet All Agree Apartment Values Are Faring Best

Magazine article Mortgage Banking

All over the Map: Prices Paid for Commercial Real Estate Currently Range All over the Board. Trophy Office Buildings in Top-Tier Cities Are Netting Record Prices, While Distressed Properties Can't Find Buyers. Yet All Agree Apartment Values Are Faring Best

Article excerpt

Since the financial meltdown, the commercial real estate (CRE) market has begun a comeback, yet the market remains highly fragmented. While a number of higher-quality assets are in demand by investors and their sales prices are rising, many properties of lesser quality, or those in markets where recovery hasn't yet taken hold, are still struggling to regain value and/or find buyers. This is the case, even as markets hardest hit by the recession are beginning to recover. * It is harder than ever to generalize about pricing for commercial real estate. Every sale that takes place today is so specific, says Lori Schneider, senior vice president in the Fort Lauderdale, Florida, office of Encino, California-based Marcus & Millichap Real Estate Investment Services Inc., who specializes in retail property investment sales. * "Every center that sells has its own unique story. The cap rates and prices used to be in a narrow range, at least for a particular kind of asset; underwriting was consistent; and the NOIs [net operating income] were predictable and uncontested. But that is no longer the case," she says. "Now you can have income in place, but people are still looking for the down side."

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Analysts at odds over best method to establish price

The commercial real estate market bottomed out in the fourth quarter of 2009, says Greg Leisch, chief executive officer, Delta Associates Inc., a commercial real estate research and advisory firm in Alexandria, Virginia. In the second quarter of 2010, prices started back up, he says.

Leisch says his source of information is the Chicago-based National Council of Real Estate Investment Fiduciaries (NCREIF), which does quarterly reports on the commercial real estate market based on properties managed by its members. Those values are derived through a mix of internal and external appraisals, as well as actual property sales.

Because NCREIF looks mostly at the same properties quarter after quarter, changes in values for these properties serve as a window into where values are going for the commercial real estate market as a whole, or at least class-A properties, says Leisch. While NCREIF doesn't publish actual prices, it uses other metrics--such as total returns, including capital appreciation--to show a change in values.

Real Capital Analytics Inc. (RCA), New York, which also surveys the commercial real estate market regularly, may be somewhat less reliable than NCREIF, because it makes assumptions about where the market is going based on sales of different properties from quarter to quarter, according to Leisch. While the organization is an objective arbiter, it cannot control the quality of the properties that sell, he says. There may be many sales of low-quality properties one month, while the following month's sales may include the Sears Tower or the Empire State Building, Leisch theorizes.

Then there is Moody's/REAL Commercial Property Price Indexes (Moody's/REAL CPPI), which uses data from Real Capital Analytics. Developed by the Massachusetts Institute of Technology (MIT) Center for Real Estate, Cambridge, Massachusetts, and Real Estate Analytics LLC (REAL), a New York-based commercial real estate research company. These indexes, which are owned by REAL, are based on lots fewer property sales than took place three years ago, says Neil Elkin, president of REAL.

Still, he says, "We have enough transactions to make these numbers valid." Because Moody's/REAL CPPI are based on repeat sales, Elkin believes they are better able to show changes in property values than some other measurements.

But Leisch says that because there are shortcomings with all indexes--the NCREIF Property Index (NPI), after all, includes appraisals, which are subjective--it is important to look at more than one index to evaluate the current state of the commercial real estate market.

Moody's/REAL CPPI

The Moody's/REAL National All Property Type Aggregate Index (which includes all types of properties throughout the United States) is published monthly. …

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