July 20, 2010

CPPI Increase - Read the Fine Print

The Moody's/REAL Commercial Property Price Indices (CPPI) is showing a 3.6% increase for May, which follows a 1.7% increase for April. On the surface, this seems like good news. Unfortunately, the details and Moody's disclaimer limits the optimism the uptick in the CPPI may create. As Moody's managing director says, the increases are "tempered by low transaction volumes, forecasts for slowing macroeconomic growth and the rising risk of a double dip recession." Wow, that's not so rosy.

Low transaction volume is for sure. May's increase is based on just 107 sales nationwide, per Moody. We don't think that is a statistically relevant number of transactions to highlight price swings in the market nationally. Beyond that, as the previous post points out, commercial real estate is a local phenomenon right now. We don't have access to the underlying Moody data, but we'd be willing to bet most of those sales were on the coasts and southeast (except Florida).

The included chart, from MIT's Center for Real Estate, shows the real story, if there is one. Prices plummeted very quickly and if anything, have managed to stop the free-fall in the last six months. That has been our sense of the market as well, both nationally and in Northeast Ohio.

But we may yet see prices fall and rise depending on any number of factors. For example, STNL properties with 12+ year term and a quality tenant may continue to see price contraction. We have seen this in the last several months on Walgreen's. Alternatively, it is still challenging to find buyers for multi-tenant office space in the Midwest and thus very difficult to even price assets.


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