REQUIRED READING: To say that today's commercial real estate markets are soft is a massive understatement, as many industry observers can attest. However, the emergence of relatively flat values has led some experts to suggest that a bottom might be just over the horizon for a few beleaguered property sectors.
Multifamily, for instance, seems to be the first asset class to be slowly climbing out of the doldrums.
‘Generally, what we see right now as the stable property type is multifamily,’ says Jeffrey Rogers, president and chief operating officer of Integra Realty Resources. ‘We do not expect the values to decrease further.’
‘In New York, there has been some rent recovery in multifamily,’ adds Dr. Peter Kozel, an executive managing director in the consulting group at Colliers International.
Although Rogers, whose company handles more than 35,000 commercial real estate appraisal assignments annually, refers to the multifamily sector's performance in general, cross-regional terms, he couches his statement by noting that every market brings its own nuances to bear.
For example, the southern U.S. experienced major overbuilding in the frenzied pre-recession era, and multifamily values in some areas of Florida are now 70% below their peaks of late 2007.
‘Most of the properties we are appraising in the South are classified as 'distressed,'’ he says.
Multifamily markets in areas of the western U.S. – mainly in parts of Arizona and in the Las Vegas metro – are also very soft, and values will likely continue to slip further. ‘From our view, these areas are not at a bottom yet,’ Rogers adds.
But overall, he expects the multifamily sector, which is currently more than 40% below its value peak from a few years ago, to show modest gains in the coming months.
The scene outside of multifamily, from Rogers' perspective, is a bit more convoluted. ‘We do not see a solid bottom yet for the other major property types,’ he says.
However, Rogers has seen signs of life. For instance, he has observed that the declines in values have slowed across most property types and in most major markets, going so far as to say that ‘strength’ might be coming for well-positioned properties, such as grocery-anchored retail properties and certain office assets.
Office properties, for example, are performing well in much of the New York metro area, where Kozel has focused a large portion of his recent analyses. Manhattan, in particular, is leading the charge.
‘If something is leased up or has a good prospect for being leased up, those assets are generally selling well,’ he remarks. ‘Many investors are looking for cashflow – with yields so low – and they're willing to pay a pretty aggressive premium for that.’
While the office sector in places like New Jersey will continue to be lackluster – thanks, in large part, to a glut of properties and no employment growth – values in Westchester County, N.Y., and Fairfield County, Conn., are rebounding.
‘It seems to have hit bottom,’ Kozel says. ‘We have a couple of submarkets that are doing better.’
However, ‘better’ is certainly a relative term. Commercial real estate prices had been plummeting since early 2008 and did not show any signs of abating until November 2009, when the Moody's/Real Estate Analytics LLC Commercial Property Price Index (CPPI) showed a slight uptick.
Since then, the CPPI has reflected volatility. The most recent CPPI data show a 4% price decrease for June 2010, following two months of increases. The CPPI is still more than 41% below its peak, which was recorded in October 2007.
Still, upon releasing the latest CPPI report, Moody's said the data could reflect a situation where ‘buyers and sellers are starting to agree on market-clearing prices.’ The rating agency further noted that it expected ‘transaction volumes to rise steadily and price volatility to ebb in the months to come.’
But Kozel and Rogers do not want to get too excited about what they have been seeing. The fact is, sales volumes are still very low across all major property types, and it is anticipated that a meaningful shift from market weakness to market strength will take place over a long time frame.