US CRE prices rise, but fundamentals weak | FT Alphaville

US CRE prices rise, but fundamentals weak

US commercial real estate prices increased 1.7 per cent in April, according to Moody’s’ proprietary benchmark. That represented the first monthly increase since January — good news, right?

Not quite. As analysts at BNP Paribas noted on Thursday, on a longer-term basis the numbers were less positive: down 16.4 per cent versus April 2009, and 41 per cent below the peak in October 2007.

Moreover (emphasis and link ours):

The report also indicates that the slight improvement in prices should be viewed in the context of extremely low volumes making it difficult to conclude that CRE prices have indeed stabilised. Moody’s believes that the reluctance of the banks to offload their properties has led to some stabilisation in prices without which prices could see another leg lower. Given continued high unemployment rates, we expect vacancy rates to remain high leading to ongoing pressure on this segment.

Although the pace of decline appears to be slowing, the fundamentals continue to remain negative for the CRE sector and investment through 2010 and much of 2011 indicating that [non-performing assets] in this segment are unlikely to decline anytime soon.

Here’s more detail from the original Moody’s report, published on Monday (emphasis ours):

…transaction volume is still very low and without higher volumes it is difficult to conclude that prices have stabilized. The retrenchment of commercial real estate markets over the past two or three years has been orderly for the most part, without an enormous flood of properties hitting the market all at once. If banks and servicers were to decide suddenly to unload their distressed properties, the resulting supply of struggling properties could cause another leg down in prices.

…even if a bottom forms at current levels, the market could bump along for several quarters as weakening fundamentals (for some property types) and the specter of interest rate increases in the future conspire to hold down values. Anemic macroeconomic growth, stubbornly high unemployment, and the impact of the spreading sovereign debt crisis in Europe on the US recovery threaten to delay any sustainable upturn in US commercial real estate prices.

The number and volume of transactions fell in April, with 114 repeat sales and a total balance of just under $800 million. While the number of sales declined only slightly from last month,
when 127 repeat sales took place, sales volume is down by more than 50% from last month
. The average repeat-sales size dropped from just over $13 million per sale to less than $7 million per sale.

Related links:
Wasn’t commercial real estate supposed to crash? – Fortune
The commercial real estate-failed bank nexus – FT Alphaville
Projecting the CMBS delinquency trajectory – SNL Interactive
Looming commercial real estate crisis offers ‘bonanza’ – FT