MIT’s Commercial Property Price Index Increases

Transaction prices of commercial property sold by major institutional investors rose by more than 4% in the third quarter, according to an index developed and published by the MIT Center for Real Estate (MIT/CRE).

The 4.4% increase in the transactions-based index for the third quarter is the first positive price change in the index in over a year and the largest increase since before the market downturn began in mid-2007. While the price index is now 36.5% below its 2007 peak, it is not as low as the 39% deficit seen last quarter, suggesting that the U.S. commercial property market may have finally found a price bottom.

"The big news this quarter is not just that the price index increased, but that transaction volume
substantially increased for the second quarter in a row, reflecting the first increase in market
sentiment in two years," says David Geltner, director of research at MIT/CRE. "Our demand index, which tracks the prices that potential buyers are willing to pay, posted its first increase after eight consecutive quarters of decline, and it was a robust 12 percent jump."

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 institutional property market. The demand-side index tracks the changes in prices that potential buyers are willing to pay (which is 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).

 "The demand index can be considered a gauge of market sentiment, at least among the all-important buy side of the market," says Geltner.

That index fell steadily for eight quarters, leaving it down to a level 48% below its mid-2007 peak by last quarter. But now it is back up to a level only 42% below peak.

"Equally interesting is that the supply-side index which gauges the prices property owners are willing to accept continued falling during the third quarter – a modest 2.5 percent decline – to a level now 32 percent below its peak," adds MIT/CRE research technician Holly Horrigan. "The combination of the upsurge in demand and the continued drop in sellers' prices led to the strong increase in transaction volume and the beginnings of a reliquification of the market."

"One quarter does not a trend make, and we are still well below normal trading volume," Geltner additionally cautions. "Nevertheless, this is the strongest sign of a bottom that we've had in two years."

SOURCE: MIT Center for Real Estate


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