Black Swan Insights

The depression continues for US commercial real estate. Today, Moody's reported that its Moodys/REAL Commercial Property Price Index declined 3.3% in August, which means prices have fallen back down to levels not seen since 2002. The index is now 45% off its all time high reached back in Oct. 2007.

Below is a chart which shows the performance of the index since 2001.

What is disturbing is how quickly the index has fallen over the last few months. The index is down almost 10% since the beginning of the year. It should be noted that the majority of transactions are distressed sales which are largely responsible for the sharp decline. This is the major reason banks are not foreclosing on commercial properties. They don't want to be stuck with the losses when trying to resale the property. No wonder banks have been so willing to restructure and extend loan terms for commercial real estate. Extend and pretend is the name of the game right now.

Black Swan Insights

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It is shocking to see how far prices have fallen for commercial real estate. From Moody's:

US commercial real estate prices as measured by Moody's/REAL Commercial Property Price Indices (CPPI) decreased 3.1% in July, the second consecutive monthly decline of more than 3%.

Nationwide, prices are currently 43.2% below their peak in October 2007 and are only 0.9% above the recession low recorded in October 2009.

The CPPI has declined 7.3% in the past year, and dropped 35.9% in the past two years.

"Commercial real estate markets were caught in a downdraft as the economy appeared to further weaken in the early part of 2010, resulting in relatively large declines in the index in the early summer," said Moody's Managing Director Nick Levidy. "The recent performance, while perhaps somewhat discouraging, should not come as a complete surprise. We have noted for several months that markets are likely to remain choppy for some time as property values slowly form a bottom in conjunction with a gradual recovery of the broader economy."

The reason there have been so few bankruptcies is that banks are more than willing to restructure the debt to avoid taking meaningful write downs. Is is part of the extend and pretend strategy. The idea being that soon or later commercial real estate will recover and that will allow underwater property owners to eventually pay back their debts. Considering prices are now down 40%+ they may have to wait for a long time.

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Words of Wisdom from Leonardo da Vinci

1. I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do.

2.Simplicity is the ultimate sophistication.

3.Life well spent is long.

4.Life is pretty simple: You do some stuff. Most fails. Some works. You do more of what works. If it works big, others quickly copy it. Then you do something else. The trick is the doing something else.

5. Marriage is like putting your hand into a bag of snakes in the hope of pulling out an eel.

Black Swan Insights

Commerical Real Estate In Free Fall--Back To 2002 Levels

The Decline Continues for Commerical Real Estate--Moody's