MIT commercial property price index ends 2009 with negative fourth quarter

CAMBRIDGE, Mass. — Transaction prices of commercial property sold by major institutional investors fell by almost 5 percent in the fourth quarter of 2010, according to an index developed and published by the MIT Center for Real Estate (MIT/CRE).

The 4.9 percent decrease in the transactions-based index (TBI) for the fourth quarter reverses an uptick in the previous quarter and takes the index down to just below its previous low of the current cycle reached in the second quarter. For the year, the index is down 22.5 percent since the end of 2008, although the second half of 2009 was effectively flat with a less than 1 percent drop in the last two quarters combined. On the positive side, transaction volume increased in the fourth quarter, suggesting improved liquidity in the market, although the increase in volume was only modest considering that the fourth quarter is traditionally a very active season in the commercial property markets. The TBI now stands 39.5 percent below its mid-2007 peak.

“It is a bit disappointing that we couldn’t put together two back-to-back positive quarters, but in the big picture, I regard the index as suggesting that the market has essentially flattened out since the end of the first half of the year, which is a lot better than continuing the drastic fall that had happened the previous year,” said Professor David Geltner, director of research at MIT/CRE.

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 (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,” said Geltner. That index fell steadily for eight quarters from mid-2007 to mid-2009, to 48 percent below its peak, but then rebounded sharply up 12 percent in the third quarter. However, the demand side index was negative again in the fourth quarter, although its drop of 4.5 percent still leaves it above its mid-year low point, now standing 44 percent below its peak.

“The supply-side index, which gauges the prices property owners are willing to accept, also was down in the fourth quarter, by 5.3 percent, to a level now 35.5 percent below its peak,” said MIT/CRE research technician Holly Horrigan. “The continued drop in the willing-to-accept pricing among property owners, for five quarters in a row now, could be viewed as a good thing, in that it is helping to reliquify the market, making more trading possible,” said Horrigan. “However, there remains a gap in pricing perception between the two sides of the market, which is keeping trading volume low by historical standards,” added Horrigan.

“Our latest results relate interestingly to recent results posted by another commercial property price index whose methodology was developed at the MIT/CRE: the Moody’s/REAL Commercial Property Price Index — or CPPI — produced monthly by Moody’s Investors Service,” Geltner noted. “That index’s November result, reported in January, turned positive for the first time in over a year, possibly also hinting at a flattening out of commercial property pricing. While the overall CPPI was down 43 percent from its peak, analysis of that index shows that relatively healthy properties, those that are not in distress, have only dropped in price about 39 percent from the 2007 peak, a similar drop to the TBI, while distressed properties in the CPPI have fallen 58 percent. The types of properties and owners tracked by the TBI would generally be less subject to distress than those tracked by the CPPI,” Geltner noted.

The TBI tracks the prices that institutions such as pension funds pay or receive when transacting commercial properties like 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 approximately 6,000 NCREIF current properties. Such an index — national, quarterly, transaction-based and by property type, and tracking demand and supply as well as prices — 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.