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MIT commercial property price index posts record drop

Gauge declines more than 10 percent in fourth quarter
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Transaction sale prices of commercial property sold by major institutional investors fell by more than 10 percent -- a record -- in the fourth quarter of 2008, according to an index developed and published at the MIT Center for Real Estate that also posted a record 15 percent drop for the year.

The 10.6 percent drop in the transactions-based index (TBI) for the fourth quarter is the largest quarterly decline in the gauge's history, which dates to 1984. The previous record was a 9 percent drop in the fourth quarter of 1987. The 15 percent fall in 2008 is also a record, topping the 10 percent and 9 percent declines in 1992 and 1991, respectively.

The index's performance means that prices in institutional commercial property deals that closed during the fourth quarter for properties such as office buildings, warehouses and apartment complexes are now 22 percent below their peak values attained in the second quarter of 2007. The index has fallen in five of the past six quarters, but the recent drop is by far the steepest.

"With the index already having fallen 22 percent in the current downturn, it now seems likely that this down market will be at least as severe as that of the early 1990s for commercial property," said Professor David Geltner, director of research at the Center for Real Estate. In the last major downturn in the U.S. commercial property market 20 years ago, the TBI declined a total of 27 percent from 1987 through 1992, with most of that drop occurring in 1991-92. "Nevertheless, a decline of 22 percent compares favorably to the stock market, which has lost more than 40 percent over the same period, including 20 percent in the last quarter," Geltner noted.

The MIT/CRE publishes not only the price index based on closed deals, but also compiles indices that separately gauge movements on the demand side and the supply side of the market that it tracks. 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 six quarters, dropping again in the third quarter by 10.3 percent, and is down 23 percent for the year and 31 percent since its mid-2007 peak.

"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," said MIT/CRE Principal Research Associate Henry Pollakowski, noting that Moody's December results were scheduled to be published Feb. 19. "This index showed a sharp decline in its latest monthly report, for November, placing that broader index of realized commercial property prices at 15 percent below its 2007 peak, even before the end of the year."

The TBI tracks the prices that institutions such as pension funds pay or receive when transacting commercial properties like 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.

A version of this article appeared in MIT Tech Talk on February 4, 2009 (download PDF).

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