Long Slog Ahead for CRE, Pimco Says

About half a trillion dollars' worth of CRE will come on the market during the next three to five years, the company posited. That flood of assets, many of which are under water, will depress prices for at least that long.

June 16, 2010
By Dees Stribling, Contributing Editor

Courtesy Flickr Creative Commons user doug.siefken

Newport Beach, Calif.-based Pacific Investment Management Co. (Pimco) said in a report on Monday that U.S. commercial property values will probably remain as much as 40 percent below their peak 2007 levels for the foreseeable future. In fact, CRE might not see those levels again until the 2020s.

About half a trillion dollars’ worth of CRE will come on the market during the next three to five years, the company posited. That flood of assets, many of which are under water, will depress prices for at least that long.

But there’s good news, according to the bond fund manager. “Capital is clearly returning to commercial real estate, helping to stem the value decline in the sector,” Pimco noted. Partly good news, that is, since the report continued: “Optimism should be tempered, because national price indices are misleading when transactions are limited and fail to reflect the significant uncertainty around property valuations.”

Chicago-Area Mall Sells For Fraction of Bubble Price

A recent transaction involving a 1 million-square-foot mall in suburban Chicago might be the wave of the future for a lot of CRE. The Charlestowne Mall in west suburban St. Charles, which has a number of functioning anchors–Sears, Kohl’s, Von Maur, Carson Pirie Scott and Classic Cinemas–fetched about $12 million, according to published reports. In other words, $12 a square foot.

California investors bought the property from a trustee acting on behalf commercial mortgage bondholders. Wilmorite Inc., which bought the property using a bubble-era loan of $42.7 million, lost control of it a few years ago.

The new owners have a lot of work to do to restore some luster to the mall. Its non-anchor space is currently about 70 percent vacant.

Home Builders Face the Morning After

The National Association of Home Builders/Wells Fargo Housing Market Index, which gauges builder perception of single-family home sales current and expected, fell this month five points to 17. That’s the same position the index found itself in February 2010 during Snowpocalypse.

The drop was something of a surprise, since economists were predicting 21. In any case, since 50 and over means that builders think the market is good, their current perception is that the market is weak beer indeed. They had a federally subsidized party for a while, but now that’s over.

Then again, the index is still above eight, where it was in January 2009, and which essentially meant that “builders thought the end was nigh.” Will the index drop so low again? The volume of sales in the coming months without the tax-credit crutch will determine that.

Whatever the woes of CRE or the oil industry or even the euro-zone, Wall Street was feeling all chipper on Monday (for now), with the Dow Jones Industrial Average ending up 213.88 points, or 2.1 percent. The S&P 500 advanced 2.35 percent and the Nasdaq gained 2.76 percent.