Valuation Drops This Year to Wipe Out Gains from 2005-2007
Feb 3, 2009 - CRE NewsCommercial property market conditions will get far worse this year and erase the valuation gains of 2005 through 2007, according to Property & Portfolio Research.
"If you thought 2008 was bad, brace yourself for an even worse 2009," the Boston research firm said in its analysis of year-end 2008 data.
PPR expects property values across all sectors to continue falling through at least 2010. Multifamily will lead the decline, registering a 32 percent drop between 2007 and 2010. Office will fall 31 percent during the period, retail 29 percent and industrial 21 percent.
A separate report from Real Capital Analytics has projected that cap rates could start approaching 10 percent later this year from rates of 5 percent to 6 percent, which have prevailed in recent years. Higher rates would be required to attract investors during the downturn in acquisition activity.
"An unleveraged, double-digit return expectation is important to capture the attention of potential investors as well as cover any mezzanine debt costs," said Real Capital, which found that commercial property sales volume in the United States last year declined 75 percent to $130.8 billion.
While there will be just a brief period when cap rates of 9 percent to 10 percent become more common, Real Capital also noted that a return of more robust investment activity will later drive rates back down, but nowhere near the 5 percent to 6 percent level.
PPR, which did not address cap rates in its projections, said there will be a strong recovery in valuations in 2012 and 2013 - led by multifamily, which will see a 17 percent increase, and office, with a 14 percent hike.
PPR also makes a strong case that today's recession will hit commercial-property fundamentals far harder than any of the recessions since 1980. It expects cumulative vacancy rates from 2007 through 2010 to reach record highs in every sector except retail, whose 17 percent rate will fall short of the 20 percent level it hit in the 1980-1982 recession and 19 percent in 1990-1991. But it will still be well above the sector's rate in the 2001-to-2003 downturn.
The valuation declines projected for the 2007-2010 period are also far worse than the declines of past recessions. In the 2001-2003 down cycle, valuations dropped less than 9 percent for office space and less than 3 percent for the other sectors. In the more severe 1990-1991 downturn, they dropped about 25 percent for office and between 8 percent and 11 percent each for the other sectors, according to PPR.
