Distressed Properties Continue To Weigh On Commercial And Residential Markets

by:  Michael L. Rich

Despite some recent modest gains, it appears that there will need to be a more substantial reduction in the number of distressed properties for sale in order for the commercial and residential real estate markets to rebound in a sustainable way.  An April 30, 2011 The New York Times reported that prices for both houses and commercial real estate have slid backwards following some mild gains, particularly in certain geographic markets.

Indeed, indexes of the two markets showed that recent declines had nearly wiped out the gains the two markets had experienced after prices appeared to bottom out.  The Moody's REAL Commercial Property Index recently reported a decline of 4.9 percent over the last 12 months, but still 0.8 percent above its low, reached last August.  The Standard & Poor's/Case Schiller index of home prices finished February 3.3 percent below where it was a year ago, which is only 0.5 percent above the low of May 2009.

As for the residential market, The National Association of Realtors estimates that approximately 40 percent of existing homes transferred in March were either in foreclosure or were "short sales" in which the home sold for less than the amount owed by the seller.  According to a chart in the N.Y. Times article, home prices nationally peaked in 2006, but did not begin to plunge until 2007.  Some recovery began in 2009, but appears to be stumbling again.  The index reflects national home prices to be down 31 percent from peak levels.

As for commercial real estate, prices on average reportedly rose until early 2008, but then declined rapidly.  Moody's reports that hotels and apartments are most distressed, with 16 percent of loans in each category classified as delinquent, while 10 percent of loans on industrial properties and around 7 percent of offices/retail properties are reportedly delinquent.

Regionally, some of the same markets are experiencing problems in both residential and commercial real estate.  According to Moody's, Nevada, Arizona and Michigan have the highest proportion of distressed commercial loans.