Strategic Defaults Now Occurring in the Commercial Real Estate Segment
Posted by Ted C. Jones on August 27, 2010
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But The Latest NCREIF Data Show an Improvement in Commercial Real Estate Values in Q2
With an estimated $1.4 trillion of commercial real estate debt set to refinance by the end of 2014, more than half of that is underwater according to a Wall Street Journal article.
Good news, however, is an improvement in the just released Q2 2010 MIT Real Estate Group’s analysis of The National Council of Real Estate Investment Fiduciaries (NCREIF) data. NCREIF is a not-for-profit trade association that provides data and analysis to the pension fund industry. They track returns and prices and have more than $234 billion of value in 6,066 income producing properties. Since these properties are held by pensions funds or retirement accounts, there no tax implications whatsoever.
Rather than using comparable sales, MIT produces what is similar to S&P’s Case-Shiller House Prices Indices, but for commercial real estate. Rather than examining comparable sales and imputing that to other property values, these indices are based on a sale of a previously acquired property.
The table below shows the typical property value change since the time of acquisition. The good news is that for the first time since 2007, property values did not track down further in value. Bad news is that essentially, if a property was acquired since 2004 (but not in the last two or three quarters) it likely is worth the same or significantly less, depending on the date of acquisition. In the table below, for example, an industrial property acquired in Q3 2007 is now worth almost 44 percent less than the purchase price. Depending on the property type, acquisitions at the market peak in 2007 are now worth from 27.7 percent to 43.6 percent less than the purchase price.
You need to note that MIT states “results for the 1st, 2nd, and 3rd quarters of any year are considered preliminary and subject to revision until the calendar year is completed with the 4th quarter results.”
Maybe the light at the end of this tunnel is not yet another train. And these days good news in real estate has been tough to find.
Commercial Property Owners Choose to Default- WSJ article
For more info on these price data see MIT Real Estate Group’s analysis of NCREIF data.
I enjoyed your talk in Detroit at the DAC… Believe me, that group has really been beat up over the last few years. I also wanted to tell you that our Michigan banks now offer you a choice of a toaster or a vacant residential lot if you open an account with them…..but you better hurry, they are running out of toasters!