by Calculated Risk on 7/19/2010 04:40:00 PM

Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index increased 3.6% in May. This is a repeat sales measure of commercial real estate prices.

Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index.

Notes: Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices.

Click on graph for larger image in new window.

CRE prices only go back to December 2000.

The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

It is possible that commercial real prices have bottomed - in general - but it is hard to tell because the number of transactions is very low and there are a number of distressed sales.

Commercial real estate values are now down 6.3% over the last year, and down 38.9% from the peak in late 2007.

Comments from PIMCO

As I've noted every month, this is a very thin market that is skewed by distressed sales. John Murray at PIMCO also cautioned about the CPPI index in a recent note: PIMCO U.S. Commercial Real Estate Project

National price indices such as the Moody’s Commercial Property Price Index (CPPI) can provide misleading indications of a recovery in CRE asset price levels. Since November 2009, the index has rebounded 3%.

While it is natural to draw comparisons between the CPPI and the S&P/Case-Shiller index used to gauge residential home prices, we caution that indexes such as the CPPI are relatively meaningless in today’s limited transaction environment – commercial real estate transaction volume fell nearly 90% from 2007 to 2009.

Our ride along meetings highlight another limitation of the CPPI. Based on repeat transactions, the index excludes the truly distressed or overpriced properties acquired in the past few years that have yet to trade, and is instead skewed by the high proportion of trophy asset and Agency-financed multifamily transactions.

Comments from MIT Professor David Geltner

Dr. Geltner writes a column that appears on the Real Estate Analytics LLC website on the lower right under "Professor's Corner". This is based on last month's data, but still explains the market dynamics:

CPPI advanced in April, due to the very strong performance of “healthy” properties (i.e., those without the RCA “troubled asset” flag). Figure 4 shows that the healthy property breakout index (estimated using the same methodology as the CPPI only dropping out the “troubled assets”) rose 6.3% from March to April while the “distressed” index declined more than 5%. The “healthy property index” is now only 33% below the October 2007 peak, while properties falling into distress since then are still selling more than 50% below 2007 values on average.

Graph from Dr. Geltner.

Whereas 2009 saw the advent of a bifurcated market between “healthy” and “distressed” properties, 2010 is now seeing what might be called a “trifurcated” market. Not only are distressed properties selling at sharp discounts, but “trophy” properties and solid “core” assets are selling at very respectable prices well above the general market average.

Roughly, CRE prices are moving up for "trophy" properties, moving sideways for the general market, and falling again for distressed properties. But this is based on very few transactions ...