New MIT Index Latest Sign of Declining CRE Values

As evidence of the declining commercial property values continues to mount, the Massachusetts Institute of Technology’s Center for Real Estate has unveiled a new survey detailing just how far pricing has plummeted. The report, the work of the center’s Commercial Real Estate Data Laboratory Initiative, discovered a 10.6 percent decline in prices in 4Q08 compared to the previous quarter for properties sold from the National Council of Real Estate Investment Fiduciaries database, placing the price index 21.9 percent below its 2007 second quarter peak. The demand-side index also continued to fall by 10.3 percent to 30.9 percent below that same second quarter 2007 peak, according to the report. The supply side of the market decreased its reservation prices by 10.9 percent in the fourth quarter and transaction volume underlying the Transactions-Based Index (TBI) was extremely low with only 40 sales including zero retail properties. TBI 2008 calendar year results also showed a record price drop, with the equilibrium (variable-liquidity) price index down 15 percent for the year topping the previous record in 1992 at 10 percent, according to the information. Meanwhile, the 2009 real estate forecast by real estate services firm Grubb & Ellis Co. doesn’t contain good news either. Even with the $700 billion relief program and the very low 1 percent federal funds rate–down by 425 basis points in a little over a year–the report’s researches said they “are not optimistic about a quick recovery.” The report predicted that the instability in the credit markets could last through most of 2009. Two reasons for the dire projection: home prices show no signs of hitting bottom, and until that happens, banks will not know the full extent of their losses; and delinquencies and defaults are just beginning to rise in other loan categories such as corporate, consumer and commercial real estate loans, according to the report.