Commercial real-estate was flat in '10

After tracking the value of commercial real estate for a year, Arizona State University professor of finance and real estate Karl Guntermann said the numbers have barely budged.

Guntermann and other analysts weighing in on the commercial real-estate market agreed that 2010 was basically a flat year with the exception of apartment buildings, which have sold to investors in increasing numbers throughout the year.

Guntermann, who measures the annual rate of change for both housing and commercial real-estate prices, said there has been essentially no change in the commercial market overall from the third quarter of 2009 to the third quarter of 2010.

"After bottoming out at the end of 2009, the commercial index has moved in a narrow range, indicating that commercial prices have stabilized, but at approximately where they were prior to the great expansion," he said.

The average annual change in commercial real-estate prices peaked at a positive rate of 28 percent in the third quarter of 2006, according to Guntermann, who in addition to following the commercial market for a year has retraced quarterly changes in price since 1990.

Prices then underwent an unprecedented decline that reached an annual rate of negative 40 percent by the end of 2009, he said.

However, things have leveled off, Guntermann said, with the annual rate of change in the third quarter at roughly zero percent.

"Interestingly, the residential market plunge lasted more than three years, but the commercial drops lasted less than a year and a half," he said.

Guntermann's research on both the commercial and residential markets is based on repeat sales, which he said is the most reliable way to estimate price changes in the real-estate market.

Repeat sales compare the prices of a single property against itself at different points in time, instead of comparing different homes and commercial properties with different characteristics.

Commercial real-estate historically has followed the trends happening in the residential market, he said.

For example, the housing market's annual rate of change peaked in mid-2006, almost two years before commercial real-estate prices peaked.

"The commercial market is tied more directly to economic fundamentals, which remained strong well into 2007, explaining why commercial prices lagged the residential market," Guntermann said.

Other local real-estate analysts agreed that the coming year is likely to bring little change in the commercial real-estate market.

Elliott Pollack, CEO of Elliott D. Pollack & Company in Scottsdale, presented his view of where commercial real-estate is headed at an economic-outlook meeting earlier this month.

"The good news is that the worst is over, but it's going to be a painfully slow recovery," Pollack said at the meeting.

The outlook for office, industrial and retail sectors remains bleak, he said.

"Those markets are slow because the economic recovery is slow, and because it will be a while before we create a sufficient amount of jobs to where there will be much demand for those product types," Pollack said.

He noted that for office properties the absorption rate, which measures new tenants moving in or out, measured in square feet, was a huge negative number in 2009, even worse than it had been the previous year.

Through the end of November, the absorption rate for 2010 has been slightly positive, Pollack said. That trend should continue over the next two years, he said, largely because no new construction of office-for-lease properties is planned.

In the industrial real-estate market, the vacancy rate in Phoenix is the highest in the nation, Pollack said. Although absorption will continue to rise due to very little new construction, a full recovery in the industrial market is still years away, he said.

As for retail, since the market follows rooftops, a significant recovery won't take place until the housing market stabilizes, which is at least two years away.

The only real bright spot in the commercial real-estate industry is in multifamily housing, Pollack said.

Vacancy rates in apartment complexes are dropping, he said, a result of the number of people who lost or walked away from their single-family homes.

Guntermann said the commercial real estate decline that leveled off in the third quarter had been far more drastic than it had been two decades ago during the savings-and-loan crisis, when a government entity known as the Resolution Trust Corporation was created to auction off foreclosed or bankrupted properties.

"By the end of 2009 the annual decline reached 40 percent, far more rapid than the 25 percent decline in 1990 during the Resolution Trust Corporation era," he said.

by J. Craig Anderson The Arizona Republic Dec. 20, 2010 05:44 PM



Commercial real-estate was flat in '10