# Is US commercial property only now crashing?



## ringledman (26 Sep 2009)

Hi, 

Western European (Ireland/Spain/UK) commercial property is down some 30-60% in valuations from the peak in 2007.

I hear & read a lot recently that US commercial property is about to crash heavily. Surely their commercial market has already crashed similar to ours?

Or was their downturn mainly in the residential market with the commercial crash only just occuring?

Cheers.


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## Purple (26 Sep 2009)

I find it impossible to believe that the residential sector can collapse and the country can enter a massive recession without the commercial property sector only going down now since both speculative and real-economy drivers stalled over a year ago.


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## GreenQueen (26 Sep 2009)

No I think the commercial market went down there around the same time as here.  Will be back if I can find the research reports to back that up.


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## Sunny (28 Sep 2009)

The commercial property market is the next big concern for US banks. Morgan Stanley and Wells Fargo as well as other banks have come out in the last couple of months and said they are beginning to see real stress in their commercial property books with no sign of a bottoming out. Even the FED have admitted they are worried about it. It is throught that commecial property has fallen by about 35% so far but there is a fear out there that the bottom has not been reached. The other big problem is the lack of a securitisation market. Until that market reopens, the sector is likely to remain very weak.

There have been a few articles on it recently. I will try and dig them out when I get a chance.


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## VOR (28 Sep 2009)

The vast majority of borrowers in the US commercial market were meeting interest payments for a long time. This is no longer the case. 
Up until now, the fall in commercial values was down to the demand side i.e. fewer purchasers.
The market is now being flooded by foreclosures or borrowers trying to get out which will push down values further. 
It is your normal second stage drop. Demand reduces prices first and then increased supply in the second instance.

No doubt we will see the same here soon as distressed properties come on to a market showing a significantly reduced demand and no credit/securitisation available.


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## z109 (28 Sep 2009)

One of the problems in the US commercial property market is the length of loans. They rollover on a 2-4 year timeframe. It is likely that a proportion of the rollovers will fail - higher interest costs to reflect greater risk, lower rent income, vacancy rates, bad LTV. So the price is sort of disentangled from the loan value.

I read somewhere recently (I think it was on CalculatedRisk) that CRE is being carried at 99.7% of book value on average on US banks' books, even though prices are way down. 

Some recent CR posts:
http://www.calculatedriskblog.com/2009/06/cre-and-residential-re-prices.html
(Prices are now down 39% from peak on July's figures...)

http://www.calculatedriskblog.com/2009/07/cre-office-building-owners-walk-away.html
As building owners are unable to afford their buildings, they are 'giving' them back to the bank, rather than rolling over the loan, resulting in the bank having to finally recognise the loss.


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## ringledman (1 Oct 2009)

The way I see it is that property (resi & commercial) is all about the yield. 

Yield is everything and I have posted previously on this. 
http://www.askaboutmoney.com/showthread.php?t=99523

I don't know what the commercial property yield in the US is but I believe they bottomed at a crazy 2-4% in Ireland and around 4% in the UK. The market has crashed some 30-60% to date, rising yields to around the 5-7% mark or so (rough calculations here!).

In my opinion 5-7% does not represent a market bottom. Property markets bottom around the 8-10% mark. So if this is correct we still do have another downturn to come. 

Perhaps inflation will come back (more so in US & UK than Eurozone) and raise rents which will stop the large nominal crash from occuring. Who knows, but commercial and residential markets are two to avoid IMO. 

The only exception I would make are Asian property as well as perhaps Germany which has done nothing for a couple of decades (the value investor in me!).


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## Chris (2 Oct 2009)

ringledman said:


> I don't know what the commercial property yield in the US is but I believe they bottomed at a crazy 2-4% in Ireland and around 4% in the UK. The market has crashed some 30-60% to date, rising yields to around the 5-7% mark or so (rough calculations here!).
> 
> In my opinion 5-7% does not represent a market bottom. Property markets bottom around the 8-10% mark. So if this is correct we still do have another downturn to come.


I agree with you about rental yields having reduced way too low during the boom years, but do you have some facts to backup your 8-10% bottom mark?



ringledman said:


> Perhaps inflation will come back (more so in US & UK than Eurozone) and raise rents which will stop the large nominal crash from occuring. Who knows, but commercial and residential markets are two to avoid IMO.


Agree, inflation is going to be a big problem for all market sectors.



ringledman said:


> The only exception I would make are Asian property as well as perhaps Germany which has done nothing for a couple of decades (the value investor in me!).


Generally agree with Asia, but not Germany. Home owner ship in Germany is extremely low when compared to UK, Ireland, US, which means very low demand. This has stayed unchanged regardless of the rate of economic growth.


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