[Editors] MIT Index: Commercial properties continue decline

[Teresa Herbert]

For Immediate Release
TUESDAY, AUG. 5, 2008

Contact: Teresa Herbert, MIT News Office
T. 617-258-5403   E.: therbert at mit.edu

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MIT price index for commercial properties continues decline in Q2
--Office properties show biggest decline

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CAMBRIDGE, Mass. — Transaction sale prices of commercial property sold  
by major institutional investors declined 2.7 percent overall in the  
second quarter of 2008 with prices for office properties declining 5.5  
percent, according to an index produced by the MIT Center for Real  
Estate.

The office sector encountered the largest drop in the quarterly  
transaction-based index (TBI) in a single quarter since 1994,  
following minor declines in the past two quarters. The decline reduces  
office property prices to their early 2007 level.

The 2.7 percent decline in the overall quarterly TBI means that prices  
for properties such as shopping malls, apartment complexes, office  
buildings and warehouses are now more than 9 percent below peak values  
attained in mid-2007.

“The down movement this quarter in the overall prices represents the  
third down quarter out of the last four quarters in the index. This  
represents a continuation of the correction in commercial property  
market prices that began last fall — a correction triggered by the  
credit crunch caused by the subprime housing mortgage crisis and  
fueled by concerns about a recession,” said Professor David Geltner,  
research director of the MIT/CRE.

Geltner said, however, that commercial properties, which produce  
regular income and serve as a major investment asset class, are  
generally in much better shape than housing. They are still  
experiencing good fundamental performance in terms of strong income,  
good occupancy, low commercial mortgage delinquency, and substantial  
equity capital interested in buying such property.

Geltner noted, nevertheless, that the generally positive fundamentals  
that currently shore up commercial property are still subject to the  
threat of a severe economic downturn.

“The biggest threat would be a major recession,” he said.

The current declines are consistent with a previously reported  
widening disconnect between buyers and sellers. The MIT/CRE publishes  
not only the price index based on closed deals, which declined 2.7  
percent, but also compiles indices that separately track movements on  
the demand side and the supply side of the property market.

The demand-side index tracks the changes in prices that potential  
buyers are willing to pay (sometimes called a “constant-liquidity”  
index of the market, because it tracks how much prices would have to  
change to keep a constant ability to sell as many properties at the  
same rate of trading volume). That index has now fallen steadily for  
all of the past four quarters, falling again in the second quarter by  
the same 2.7 percent as the realized price index. During the past four  
quarters, the cumulative decline in potential buyers’ prices is more  
than 17 percent versus their mid-2007 peak.

The supply side of the market — the property owners who are the  
potential sellers —matched the demand-side movement in the second  
quarter, also revising their willingness-to-sell prices downward by  
2.7 percent, and this lock-step movement kept the overall sales volume  
tracked by the index nearly constant, at the historically low levels  
reached earlier in 2008.

Henry Pollakowski, MIT/CRE senior economist and co-director of the  
Center’s Commercial Real Estate Data Laboratory (CREDL), noted that  
the gap represents “a second consecutive quarter of historically low  
trading volume.”

“This quarter at least shows a pause in any further pulling away of  
supply from demand such as we had seen in the first quarter,”  
Pollakowski said. “The result of this continuation of the relationship  
between supply and demand is that the volume of closed transactions  
tracked by the index remained low this quarter after falling  
drastically by 47 percent from the last quarter of 2007 to the first  
quarter of 2008.”

Geltner noted that: “The results posted by our index are corroborated  
by recent evidence from another commercial property price index whose  
methodology was developed at the MIT/CRE, the Moody’s/REAL Index  
produced by Moody’s Investors Service, which showed a decline of 3.5  
percent in its latest monthly report, for May, placing that broader  
index of realized commercial property prices at about 9 percent below  
its 2007 peak, very similar to the NCREIF-based index reported here.”

The TBI tracks the prices that institutions such as pension funds pay  
or receive when transacting properties such as shopping malls,  
apartment complexes and office towers. The MIT Center’s TBI is based  
on prices of National Council of Real Estate Investment Fiduciaries  
(NCREIF) properties sold each quarter from the property database that  
underlies the NCREIF Property Index (NPI), and also makes use of the  
appraisal information for all of the currently 6,000 NCREIF  
properties. Such an index — national, quarterly, transaction-based and  
by property type — had not been previously constructed prior to MIT’s  
development of it in 2006. NCREIF supported development of the index  
as a useful tool for research and decision-making in the industry.

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