From US Capital Trends March '09
Commercial Is No Longer Faring Better Than Residential
*Residential: S&P/Case-Shiller U.S. National Home Price Index
*Commercial: Moody’s Real CPPI national composite
*Residential: Census Bureau New Home Sales, number of houses not seasonally adjusted
*Commercial: RCA number of commercial property sales, by number of properties ($5M+)
*Residential: Census, Private Residential Construction Put in Place
*Commercial: Census, Value of Private Nonresidential Construction Put in Place
For a period after the housing markets began to slow, the commercial property markets surged. The vast overbuilding in housing compared to modest commercial development and the relatively healthy fundamentals (rents and occupancies) on the commercial side continued to lure both debt and equity capital to commercial property. That last hurrah is now coming back to haunt the industry and may cause the commercial downturn to be more severe than the residential one.
Prices are now falling at a similar rate in both the commercial and residential sectors, down approximately 17% year-over-year (YOY). Commercial real estate prices surged higher at the peak, but also surged again in late 2006 even as housing prices cratered. Commercial real estate prices continued to rise for another 15 months after housing prices peaked.
Sales Volume for commercial properties, down 80% YOY last month, has taken a nosedive compared to the residential market. Residential sales started to falter late in 2005, while commercial transaction volume stayed strong for another 18 months and only slowed after the CMBS market seized up in Aug. 2007.
Construction activity is only now starting to slow for commercial property, a full two years after residential construction slowed. From mid-2006 until very recently, commercial development was growing rapidly at an annual rate of approximately 20% per year.
Although over development is not a root cause of this downturn, there could soon be more vacant space than after the construction boom of the 1980s. Rapidly shrinking demand for commercial space has led forecasters to predict vacancy rates to top those hit in the early 1990s.
The residential markets have also had a key advantage over the commercial sector: public support and attention of the policymakers. Already much of the Federal intervention and stimulus has been focused on housing: an $8,000 credit for new homebuyers, a moratorium on foreclosures, and millions in grants to local authorities to purchase and upgrade foreclosures. In comparison, almost nothing has been done for the commercial real estate industry until today with the unveiling of the “Public-Private Investment Program” and the expansion of the TALF program to legacy assets and lower rated mortgages—both residential and commercial. It seems that the worsening problems in the commercial sector are finally capturing the attention of the policymakers.
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