Wednesday, April 20, 2011

Commercial Real Estate Prices Falling

Moody's reported this morning that commercial real estate prices fell 3.3% in the month of February and are now down 44.7% from the peak of the bubble in 2007.

Cap rates (the rate paid for real estate income which determines the purchase price) have moved down considerably in relation to10 year treasury bonds (known as the "spread") and some investors are paying close to the same rate of return for commercial real estate as risk free government bonds in places like California.

This is complete irrationality in the market and those purchasing today will be slaughtered during the next leg down in prices.  This should coincide with the point when banks must finally release their "extend and pretend" non-performing loans sitting on their balance sheets underwater.

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