- James I. Clark III
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Distressed CRE Has Hit a Plateau
Distressed commercial real estate volumes seem to have reached a plateau of $186.9 billion in October, according to a report prepared by Delta Associates that crunched numbers provided by Real Capital Analytics. The trend has been apparent for several months, according to Delta’s CEO Greg Leisch.
Even as the industry breathes a collective sigh of relief, the question remains: When will the amount of distress start to recede? Industry experts believe that is unlikely to happen before 2012. According to Delta, the plateau first came onto the scene in the spring of 2010, though the firm doesn’t expect any consequential progress next year. Leisch says that lenders will continue to extend debt obligations, even as commercial property values stabilize in some markets. 2011 is likely to bring yet more pain, with $300 billion worth of CRE loans coming due. Delta’s report notes that the office sector has the greatest number of distressed assets, valued at $45.6 billion nationally.
There’s also good news in the fact that commercial property values increased 1.3 percent in October, according to Moody’s Investors Service. That’s the second consecutive monthly gain and represents a 3.2 percent increased over the previous year, notes the Moody’s/REAL Commercial Property Price Index. The Moody’s/REAL Index is 42 percent below the high point it reached in 2007.
Robert Bach, chief economist for Grubb & Ellis, Inc., said demand is rising for trophy office buildings in cities such as New York, San Francisco and Washington, D.C. In Chicago, 300 North LaSalle went for $655 million and the Hyatt Center fetched $625 million. Next year, investors may purchase lower-quality buildings in prime markets, and top-tier office towers in secondary markets. “This investor enthusiasm has been confined to core properties in primary, supply-constrained markets,” Bach said. “There’s still a lot of distress out there.” Despite the remaining distress, commercial properties sales doubled to $16 billion during the 3rd quarter when compared with the same timeframe in 2009, according to Real Capital Analytics. East Coast properties averaged a 22 percent increase over 2009, with prices rising 9.1 percent in New York City and 17 percent in Washington, D.C.