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MIT commercial property price index continues fall

Gauge declines nearly 6 percent in first quarter; demand sentiment in record drop
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Transaction prices of commercial property sold by major institutional investors fell by almost 6 percent in the first quarter of 2009, according to an index developed and published by the MIT Center for Real Estate.

The 5.8 percent drop in the transactions-based index (TBI) for the first quarter is the fourth consecutive quarterly drop and the sixth in the past seven quarters. The index is now 21 percent below where it was a year ago and 26 percent below its mid-2007 peak - comparable to the 27 percent drop the index experienced in the previous major commercial property downturn in the late 1980s and early 1990s.

"It's possible that the first quarter of 2009 was the nadir in market sentiment," said Professor David Geltner, director of research at the MIT Center for Real Estate. "Sales volume is down almost to nothing, as reflected in our demand index. The prices buyers are willing to pay fell a record 12 percent in the first quarter and is now 28 percent below a year ago and 39 percent below its mid-2007 peak," 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 seven quarters. In contrast, the supply-side index, reflecting what deep-pocket institutional owners of commercial properties are willing to sell for, actually rose slightly, by about 1 percent, in the first quarter. "This type of disconnect between the supply and demand sides of the market, with demand-side sentiment plunging and property owners refusing to sell into such losses, is greater than we have ever seen before, and is very nearly removing every bit of liquidity from the market," said Geltner.

"As is generally the case, 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 Commercial Property Price Index produced by Moody's Investors Service," said MIT/CRE Research Technician Holly Horrigan, noting that Moody's March results were scheduled to be published May 19. "The Moody's was already down 22 percent as of February," Horrigan noted.

The TBI tracks the prices that institutions such as pension funds pay or receive when transacting commercial properties such as shopping centers, 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 May 13, 2009 (download PDF).

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