Look For Interest Rate Increases

Direct link at end of article.

Consumers in U.S. Face the End of an Era of Cheap Credit
By NELSON D. SCHWARTZ

Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.

“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”

Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Mr. Mayer.

The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.

Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.

With losses from credit card defaults rising and with capital to back credit cards harder to come by, issuers are likely to increase rates to 16 or 17 percent by the fall, according to Dennis Moroney, a research director at the TowerGroup, a financial research company.

“The banks don’t have a lot of pricing options,” Mr. Moroney said. “They’re targeting people who carry a balance from month to month.”

Similarly, many car loans have already become significantly more expensive, with rates at auto finance companies rising to 4.72 percent in February from 3.26 percent in December, according to the Federal Reserve.

Washington, too, is expecting to have to pay more to borrow the money it needs for programs. The Office of Management and Budget expects the rate on the benchmark 10-year United States Treasury note to remain close to 3.9 percent for the rest of the year, but then rise to 4.5 percent in 2011 and 5 percent in 2012.

The run-up in rates is quickening as investors steer more of their money away from bonds and as Washington unplugs the economic life support programs that kept rates low through the financial crisis. Mortgage rates and car loans are linked to the yield on long-term bonds.

Besides the inflation fears set off by the strengthening economy, Mr. Gross said he was also wary of Treasury bonds because he feared the burgeoning supply of new debt issued to finance the government’s huge budget deficits would overwhelm demand, driving interest rates higher.

Nine months ago, United States government debt accounted for half of the assets in Mr. Gross’s flagship fund, Pimco Total Return. That has shrunk to 30 percent now — the lowest ever in the fund’s 23-year history — as Mr. Gross has sold American bonds in favor of debt from Europe, particularly Germany, as well as from developing countries like Brazil.

Last week, the yield on the benchmark 10-year Treasury note briefly crossed the psychologically important threshold of 4 percent, as the Treasury auctioned off $82 billion in new debt. That is nearly twice as much as the government paid in the fall of 2008, when investors sought out ultrasafe assets like Treasury securities after the collapse of Lehman Brothers and the beginning of the credit crisis.

Though still very low by historical standards, the rise of bond yields since then is reversing a decline that began in 1981, when 10-year note yields reached nearly 16 percent.

From that peak, steadily dropping interest rates have fed a three-decade lending boom, during which American consumers borrowed more and more but managed to hold down the portion of their income devoted to paying off loans.

Indeed, total household debt is now nine times what it was in 1981 — rising twice as fast as disposable income over the same period — yet the portion of disposable income that goes toward covering that debt has budged only slightly, increasing to 12.6 percent from 10.7 percent.

Household debt has been dropping for the last two years as recession-battered consumers cut back on borrowing, but at $13.5 trillion, it still exceeds disposable income by $2.5 trillion.

The long decline in rates also helped prop up the stock market; lower rates for investments like bonds make stocks more attractive.

That tailwind, which prevented even worse economic pain during the recession, has ceased, according to interviews with economists, analysts and money managers.

“We’ve had almost a 30-year rally,” said David Wyss, chief economist for Standard & Poor’s. “That’s come to an end.”

Just as significant as the bottom-line impact will be the psychological fallout from not being able to buy more while paying less — an unusual state of affairs that made consumer spending the most important measure of economic health.

“We’ve gotten spoiled by the idea that interest rates will stay in the low single-digits forever,” said Jim Caron, an interest rate strategist with Morgan Stanley. “We’ve also had a generation of consumers and investors get used to low rates.”

For young home buyers today considering 30-year mortgages with a rate of just over 5 percent, it might be hard to conceive of a time like October 1981, when mortgage rates peaked at 18.2 percent. That meant monthly payments of $1,523 then compared with $556 now for a $100,000 loan.

No one expects rates to return to anything resembling 1981 levels. Still, for much of Wall Street, the question is not whether rates will go up, but rather by how much.

Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.

But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said. LINK

Volume of CMBS Delinquent Loans Climbs

We're not anywhere near out of the woods yet but it seems all these assets we anticipated to come to market are finally doing so (or are at least well on their way). There is a lot of money sloshing around out there, and buyers eager for aggressively priced (read: discounted) prime bank assets. Once we can get these assets on the market and into the hands of people who will capitalize upon them, I think we'll all be better off. For me this is some of the best opportunity I've seen since I started selling commercial real estate. Bring it on!

Volume of CMBS Delinquent Loans Climbs to $47.8B in February
Mar 29, 2010 - CRE News

Another $1.9 billion of CMBS loans became delinquent in February, bringing the total volume of delinquent loans to $47.8 billion, or 6% of the total universe tracked by Realpoint.

That compares with a rate of 5.76% a month earlier. If you exclude agency loans and those that are less than a year old, the delinquency rate in February was 6.32%.

Delinquencies will continue to increase. That's indicated by the $76.13 billion of loans that are in the hands of special servicers. While not all of those are delinquent, they're all at high risk of becoming late. Realpoint classifies loans as being delinquent when they're more than 30-days late.

To that end, Realpoint has updated its projection for delinquencies and now expects them to hit as high as 12% of the CMBS universe by the end of the year under a heavily stressed scenario. It expects delinquencies to be between 8% and 9% by mid-year. The $3 billion of financing on Manhattan's Stuyvesant Town/Peter Cooper Village apartment complex was not deemed delinquent as of the end of February, but did not make its March payment. So next month's delinquent-loan tally will be bolstered by at least $3 billion.

In a change from recent months, the Horsham, PA, rating agency saw a decline in the volume of loans classified as 30-days late. In February, $6.8 billion of loans were in that bucket, down from $7.7 billion a month earlier. The 60-day bucket also saw a decline, although not as pronounced, to $4.7 billion from $4.8 billion.

All other delinquency categories saw an increase in volume, with the 90-day bucket growing the most, to $25.9 billion from $23.8 billion. Many loans sit in that category for substantial periods of time as their workout or foreclosure strategies are ironed out. An example is the $4.1 billion of debt on the Extended Stay Hotels chain. It became delinquent last November, so its more than 90-days late. And it will stay that way as the hotel company gets recapitalized.

The delinquency rate for securitized hotel loans was 10.2% last month, up from 9.5% in January. Apartment loans have a 7.04% delinquency rate, up from 7%, and retail loans a 5.4% rate, unchanged from a month ago. The office delinquency rate, which has remained lower than that for the other major sectors, punched through the 4% market in February, to 4.2%, from 3.7% in January.

A total of $461.8 million of loans were liquidated during February, marking the third straight month during which more than $300 million were eliminated. Of the total, $222.2 million were resolved with little loss. Most of those were refinanced after their maturity date.

The best example of that was the $165 million of debt on 63 Madison Ave., a 797,377-square-foot office building in the midtown south area of Manhattan. The loan had matured in January.

A $105 million piece of the debt was securitized through COMM, 2005-LNP5, and the remainder through GE Commercial Mortgage Corp., 2005-C1. The loan was refinanced after its maturity date with a $150 million mortgage from Bank of China. The remaining $15 million was raised by the building's owner, George Comfort & Sons, by tapping a $15 million letter of credit that a tenant at the building used to guarantee its lease.

That resolution resulted in a loss of 1% to the deals that owned the matured debt.

Meanwhile, 44 loans with a balance of $239.6 million were resolved with losses that averaged 64.7% of their balance.

The largest of those had a $42.5 million balance and was backed by 1650 Arch St., a 553,349-sf office building in downtown Philadelphia that is owned by Behringer Harvard. The Dallas investment manager bought the loan, which was securitized through Credit Suisse First Boston Mortgage Securities Corp., 2002-CKS4, at a discount to its face value. The loan's resolution resulted in a loss of $9.5 million to the CKS4 deal.

Tough Times For Commercial Real Estate

Our local newspaper is figuring out what many of us have known for a while: the local commercial real estate market is pretty bleak. But that all depends on which side of the fence you're on. Interestingly, 2009 for me was a fairly busy one, with nearly all of my deals occurring on the leasing side. Last year I saw a lot of relocation...basically people moving from one leased space to another because of more favorable rents and aggressive tenant incentives. I did not see all that many startups, though. I do agree (as I had stated in this 12/19/09 post), GDP and employment will lead the way out of the recession. For the most part, however, asking rents are still way too high in some parts of town to attract new startups in such a tough economy. One thing's for sure, landlords who don't have particularly attractive or strategic locations, and who refuse to get aggressive are going to end up getting steamrolled. Story link below (Sarasota Herald).

Tough times for commercial real estate

By KEVIN L. McQUAID

Published: Monday, January 4, 2010 at 1:00 a.m.

To borrow a biblical expression, it may be easier these days to pass a camel through the eye of a needle than it is to get a commercial real estate loan.

Despite federal bail-out money intended to stimulate lending, loans for investment in office buildings, shopping centers, industrial sites and raw land are increasingly rare, the result of falling values and other factors.

Commercial property owners and mortgage brokers say the lack of capital also stems, in part, from new federal regulations intended to staunch foreclosures and halt the aggressive lending practices of the early 2000s.

"It's ironic that the federal government put all the stimulus money into banks, while another branch of the government is over-regulating capital reserve requirements on banks," said Brett Hutchens, chief executive officer of Casto Lifestyle Properties, a Sarasota development firm that owns shopping and lifestyle centers nationwide.

"The same government is providing both the carrot and the stick to lenders," Hutchens said. "It's created gridlock and made lending and borrowing very, very difficult."

"It's a Catch-22 the government has imposed," said N.J. Olivieri, president and owner of Sarasota-based Horizon Mortgage Corp. "They tell the banks to make loans but then tell the FDIC to tighten the restrictions on new lending."

New regulations notwithstanding, lenders say the pullback in available credit is appropriate, given the shaky economy.

"Banks are simply not looking to take extended risk today," said Charlie Murphy, chief executive of the Bank of Commerce, a Sarasota lender, and a board member of the Florida Bankers Association, a trade group.

"It's not unusual for banks, in bad economic times, to tighten their lending standards," Murphy said. "And regulators are not too happy these days about allocating new money to commercial real estate."

Other forces

Banks have been hurt, as well, by other forces beyond their control.

Most notable has been the exit from the lending market by risk-averse insurers and pension funds, typically a key source for permanent mortgages.

That has crippled commercial real estate owners seeking to refinance or simply shift loans from banks, as is usually done.

That, in turn, has forced banks to keep mortgages on their books, which further limits their ability to cut new loans -- especially in the construction and real estate sectors.

The precipitous drop in commercial real estate values -- combined with falling rental rates on nearly every property segment -- represents the largest factor in the dearth of lending, however.

Retail rental rates have fallen by as much as half, and many tenants remain unable to pay rent at all, part of the fallout from the longest economic recession since the Great Depression.

Vacancies, too, from super-regional malls to neighborhood-anchored strip centers, have risen dramatically.

"In many cases, shopping centers are full, but not all of the tenants are paying rent," Olivieri said. "Landlords don't want their space to go dark, so they're letting them stay put."

Office rents have also fallen, in Southwest Florida and nationwide -- by 20 percent to 30 percent in some cases.

"In some submarkets, there is an even greater devaluation of rents," said John Harshman, president of Harshman & Co., a Sarasota commercial real estate brokerage firm.

The lack of income, and decrease in values, has forced many property owners to come up with new equity on loans to satisfy lenders' re-appraisals, investors say, even on performing mortgages.

Regulators, too, are calling on banks to beef up reserves and loan coverages by thinning loan-to-value ratios.

Restrictions

Meanwhile, the few commercial real estate loans that are available come with excessive restrictions, including onerous equity requirements and repayment schedules, which are also the result of new federal regulations.

In many cases, lenders that once required investors to put down 20 percent or 30 percent equity are demanding twice those percentages -- and borrowers' personal guarantees -- before they will consider loaning money.

"We've gone from having an unsecured line of credit, on a performing loan, to getting a commitment for just one-year from the bank, and the terms are complex," said Andy Dorr, a senior vice president with Githler Development Co., a Sarasota real estate investment and development firm.

As a result, Horizon and others have begun lining up equity partners for developers or investors, Olivieri said.

At the same time, Dorr said, the costs associated with commercial real estate borrowing -- appraisals, origination fees, legal expenses and environmental analysis -- have increased in many cases.

The hiked fees and the lack of new capital are both tied, investors and lenders say, to the fear that a commercial real estate meltdown is in the offing. Already, development giants such as mall owner General Growth Properties have defaulted on commercial real estate loans -- a signal to some analysts that another wave of foreclosures is ahead. Next year alone, hundreds of billions of commercial real estate loans, many of which were cut during the real estate boom and required interest-only payments, will mature or come due nationwide. When that occurs, many predict, defaults will spike.

"Everyone keeps saying that commercial real estate is the next shoe to drop," Hutchens said. "Well, I have to agree: It's about to drop."

The answer, industry experts say, can be summed up in a single word: Jobs.

"We have to stimulate the economy with more jobs and small business," Murphy said. "When we have jobs, then businesses expand and the economy cycles upward. The opposite is also true, and it creates a vicious, self-fulfilling prophecy."

"People have to go back to work," Olivieri said. "Specifically, in construction.

"Construction has always led the way out of recession; it's key. It starts the employment cycle, and then retailers hire and the cycle returns to supply and demand. But if you don't have a job, if you don't know where your next dollar is coming from, then you don't spend," Olivieri said.

Unfortunately, for Florida, that job growth may be a long time in coming.

Unemployment in Southwest Florida stands at 12.7 percent, slightly above the 11.5 percent statewide average, which is at the highest level since October 1975. Nationally, unemployment is just under 10 percent.

Even more dire are some economists' predictions that Florida's unemployment rate will not fall to 6 percent -- within the range of a moderately healthy economy -- until 2018.

If that proves true, experts believe commercial real estate will remain depressed well into the future.

"The 12 percent unemployment rate in Sarasota and Manatee counties, and the 10 percent rate nationally, will create more commercial real estate vacancies," Harshman said. "And more vacancies will, in turn, further drive down commercial real estate values."

LINK

More Bad News

Yeah, yeah...we know, we know.

Tampa Industrial Vacancy Up

The latest report from Cushman Wakefield shows a noticeable gain in industrial vacancies the Tampa Bay area. Some eye-popping numbers: the area market shed almost 54,000 jobs, nine consecutive quarters of vacancy increases and six consecutive quarters of declining rents. Link to the article and FREJ is below.

TAMPA - The Tampa industrial market continued to weaken in the second quarter of 2009 primarily due to the decrease in industrial-related jobs and the sustained deficit of demand from tenants in the market looking to lease or buy space.

Since mid-year 2008, the Tampa Bay market lost a total of 53,900 positions, with the construction industry losing 13,800 positions, manufacturing employment decreasing by 6,800 jobs and trade, transportation and utilities losing 2,700 jobs. The negative job growth, coupled with the current economic slowdown has resulted in a continued lack of new and expansion leasing activity, increased vacancy and a decline in rental rates during the quarter.

Additionally, sales activity has been nearly non-existent due to the dip in prices buyers are currently willing to pay and their difficulty to obtain financing.

At the close of the second quarter, Tampa’s industrial market fundamentals continued to grow weaker, following the trend which began over a year and a half ago when the national and local economy both took negative turns.

For the ninth quarter in a row, overall vacancy throughout the market increased. The marketwide overall vacancy rate of 9.5% at the close of the second quarter of 2009 increased a full percentage point from the initial quarter of 2009 and increased an astounding 3.4% from the vacancy documented at mid-year 2008.

As can be anticipated with such a significant increase in vacancy throughout the market, overall absorption posted negative 623,026sf over the past three months, bringing the year-to-date total to negative 943,309sf. Although the current negative absorption total appears dramatic, when compared to the year-to-date total recorded this time last year, year-to-date 2009’s negative absorption increased just 107,207sf or 11.5%.

The feeble tenant demand currently being experienced in the market has resulted in a decrease in asking rents for the sixth straight quarter, bringing average asking net rental rates down to levels that haven’t been recorded in the market since the first quarter of 2006.

Marketwide, the direct net asking rental rate averaged $5.95 psf at quarter-end, a decrease of $0.41 psf since last quarter and $1.10 psf from this time last year. Warehouse/distribution space, which accounts for 70.4% of the industrial space in the Tampa market, experienced the largest decrease in asking rents, declining $0.44 psf since last quarter and a much more substantial $1.09 psf since this time last year to an average of $4.89 psf by the end of the second quarter of 2009.

Forecast

Clearly, this economic downturn has lasted much longer than originally anticipated. While much of the fallout in the industrial market can be traced to companies tied to the construction and manufacturing sectors, Cushman & Wakefield believes that the fallout from these segments is largely, if not almost completely, behind us.

Though the effects of the prolonged slump in the economy will continue to have a negative impact on the market well into 2010, current industrial market fundamentals are definitely favoring tenants in the market. Competition between landlords will continue to drive down asking rents and increase lease concessions, decreasing the tenant’s effective rental rate costs over the term of their lease.

Article Link

Long, Hot Summer

CoStar recently polled some real estate experts and their findings are less than encouraging for the COMRE market. In fact, some of this is downright scary, depressing stuff. Below is an excerpt, follow the link below to read the entire article.

Despite Promising Signs, Many Wary that Recession's Knockout Punch Could Still Come
Commercial Real Estate Industry Says Recovery is Not Around the Corner

By Mark Heschmeyer
June 17, 2009
The End Is Near (for This Recession).

So read some of the economic placards that have been trotted out in policy statements these days with catchphrases such as 'Sustainable Recovery.' 'Recession Is Coming To An End.' 'Policy Actions Having an Effect.' 'Seeing Green Shoots of Growth.' and 'The Crisis Has Stabilized.' Many pointed to the more than 2,000-point climb in the Dow Industrial Average over the last three months as proof that federal stimulus measures appeared to be having an effect in rousing the slumping economy.

Just this week, chief economists from JPMorgan Chase & Co., Wells Fargo & Co., PNC Financial Services Group, Morgan Stanley and others said they expect the economy to "recover from its deep slump by late summer." The group that makes up the Economic Advisory Committee of the American Bankers said they expect the nation's gross domestic product (GDP) to increase 0.5% in the July-September quarter -- this after falling a projected 1.8% in the April-June period.

snip...

No Consumer, No Recovery

The bottom has not been reached in retail. Vacancies in the Whittier area are increasing and rents are still headed downward.
David Johnson, Partner at Johnson, O'Neill & Associates Inc. in Downey, CA

An alternative opinion to a quick 1.5- to 2-year recovery touted by many groups is that there can be no recovery because of the decline in consumer spending due to an individual's perceived loss on their net worth based on their home value.
Brian H. Strout, Acquisition Manager at Sciens Real Estate Management in Greenville, SC

The long and short of it is that so far, this seems like a recovery without the consumer. And I just don't think that in an economy driven 70% to 80% by the consumer, that a consumer-less recovery is possible. The credit card default rates are another telltale sign of mounting problems. Americans are running out of spending power from every angle (home equity, personal credit and now, income loss from job losses). And we haven't even seen the bubble start to burst in commercial.
Tony O'Neill, Broker at Voit Commercial Brokerage in San Diego, CA

I represent Healthy Fast Food Inc. They have a new branded concept they are opening up across the country called U-Swirl Frozen Yogurt. From a tenant point of view, HFFI along with my other clients are still very concerned about consumer spending, unemployment, consumer confidence, foreclosures, and the economy as a whole. If we have hit the bottom, then it is our view that we are going to stay there and bounce for quite a long time. U Swirl is only doing screaming deals. The kind where the landlord is screaming, not the tenant.
Ron Opfer, CCIM, Broker with Coldwell Banker Premier Realty in Henderson, NV

My assessment is that the economy will pick up starting fourth quarter of 2009 but the employment situation will only start to increase during first quarter of 2010. I think the worst of the commercial real estate market is still yet to come. Commercial markets will be in recession through mid next year.
KC Sanjay, Senior Economic and Real Estate Analytics at Guaranty Bank in Dallas, TX
Property Fundamentals Weak and Getting Weaker

I don't think the end is anywhere in site for a commercial real estate bottom. The CMBS market has yet to even start clearing the defaults. when these sales really start, they will dwarf the RTC volume. What these properties will sell for in a market without leverage is anybody's guess. My feeling is that the 25% percent down of years gone by will remain the same, although in the future, that will be the whole price! Just when things may hit bottom in a year or two, we will most probably be faced with hyper inflation, which is at best a forced savings account for performing assets, but at worst an additional huge stress for non-performing real estate. What will a half empty office building be worth in a declining market when prime is 14%? It is a scary thought.
Andrew J. Segal, President of Boxer Property in Houston, TX

I do not believe the end of the recession is in sight yet. The new 90-day moratorium on residential foreclosures commencing just [this week] will only exasperate a more severe response of the residential markets' attempt for correction upon expiration of the 90-day moratorium. The commercial real estate correction has only just begun and it will be a painful and significant correction. I believe 2009 will prove to be the worst single year of the last 50 years. Keep in mind; every office job loss represents a minimum of 250 rentable square feet, which goes idle and far more in other property types. When you do the math - it's staggering. Now factor in deleveraging the CRE universe, increased cap rates likely to settle in the 9% - 11% range based on stabilized income, increased cost of capital, high vacancy/availability rates, additional unemployment each month including continued historical layoff's post-bottom with a beginning recovery and the lack of debt and equity needed to help a correction along. . . what do you have? Answer = we have the "perfect CRE storm" and much restructuring to accomplish with no end in sight soon.
Richard A. Hawthorne, Principal of Hawthorne Cos. in Santa Monica, CA

The capital and debt markets for real estate remain dysfunctional. Moreover, there remains a large gap between the expectations of sellers and buyers. This means that virtually no arm's length commercial real estate sales are taking place. The small numbers of sales transactions that are reported mostly have been distressed sellers or workouts and do not establish an "arm's length" price or even a trading market. Until properties trade freely and with frequency, investors will remain reluctant to bid on acquisitions from fear of "catching a falling knife".
Louis J. Rogers, CEO of Rogers Realty Advisors LLC in Glen Allen, VA

Read the entire article here

Reuters: Values of Institutionally-Bought Commercial Property Post Decline

Note that this is for institutional investors only. Here we go:

By Ilaina Jonas

NEW YORK (Reuters) - U.S. commercial property prices by institutional investors posted their greatest quarterly fall in 22 years, according to an index developed by the Massachusetts Institute of Technology Center for Real Estate.

The transaction-based index, which MIT developed in 1984, fell 10.6 percent in the fourth quarter, surpassing the record fall of 9 percent seen in the fourth quarter 1987.

The index tracks the prices that institutions such as pension funds pay or receive when buying or selling commercial properties like shopping malls, apartment complexes and office towers.

"It now seems likely that this down market will be at least as severe as that of the early 1990s for commercial property," Professor David Geltner, director of research at the Center for Real Estate, said in a statement.

The index fell a record 15 percent in 2008, and easily surpassed the 9 percent decline seen in 1991 and the 10 percent drop in 1992.

That period marked one of the most severe recessions in commercial real estate recession and was the result of the savings and loan debacle and U.S. tax code changes in 1986.

The current downturn in commercial property is the result of the credit crisis, which has cut off debt financing for sales. The U.S. recession has also dealt a blow to commercial real estate returns, as business tenants cut staff and office needs, cut hotel demand, or close stores.

The index declined a total of 27 percent from 1987 through 1992, with most of the decline occurring in 1991 and 1992.

The index's performance means that prices in institutional commercial property deals that closed during the fourth quarter for properties such as office buildings, warehouses and apartment complexes are now 22 percent below their peak values attained in the second quarter of 2007. The index has fallen in five of the past six quarters, but the recent drop is by far the steepest.

The MIT Center for Real Estate also compiles indexes that gauge movements on the demand side and the supply side of the market that it tracks.

The demand-side index, which tracks prices potential buyers are willing to pay, has fallen for the past six quarters, and is down 23 percent for the year and 31 percent since its mid-2007 peak.

LINK