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Latest CPPI Data Show "Trifurcating" Market

10/20/2010 | By Allen Kenney

New data from the Moody's/REAL Commercial Property Price Index (CPPI) suggest the U.S. commercial real estate market is "trifurcating," according to one of the index's publishers.

Overall, the index registered a 3.3 percent decrease in August 2010, indicating prices have hit a new low during the latest economic downturn. The index measured 105.37 for August. The previous low during the recession was 107.98, which occurred in October 2009.

Since the commercial real estate market hit its peak in October 2007, the CPPI has dropped more than 45 percent.

REAL President Neal Elkin said a closer inspection of the data suggested that the market has been divided into three distinct segments.

"It's a complicated picture," Elkin said in an interview with REIT.com. "It's not as simple as saying there are good assets and there are bad assets."

"Trophy" assets in the country's three premier markets—New York, San Francisco and Washington, D.C.—demonstrated a 5 percent increase in price levels in August from the month before, meaning these properties had gained 37 percent since January. Pricing in secondary markets have remained relatively flat. Meanwhile, "distressed assets" saw their valuations drop 10 percent for the month, meaning they've fallen more than 60 percent from their peak level in 2007.

Elkin inferred that the steep decline in distressed assets had served to drag down significant gains in trophy properties.

In an analysis of the latest data, David Geltner, director of research for the MIT Center for Real Estate, noted that the gulf between distressed assets and relatively "healthy" assets has never been wider, which is a bad sign for the market.

"The happy headlines from the trophy market segment mask some very real and substantial pain in the distressed market segment, a pain that is getting worse in terms of the prices that distressed properties are fetching," Geltner said.

Elkin echoed Geltner's sentiments, pointing out that a small slice of top-shelf commercial real estate assets are essentially propping up pricing in the entire market at the moment. "If someone can appreciate the nuance of the asset class, then there are some very real causes of concern," he said.