Welcome to the third episode of 'The Inside Look’. Senior Commercial Real Estate Economist Xander Snyder hypothesizes how long and how far might commercial property prices fall before we see a recovery.
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Transcript:
Hi, I'm Xander Snyder, and you're watching First American's Inside Look.
Commercial real estate prices have fallen by about 10% over the last year. This raises the question: for how long and by how far might commercial property prices fall before we see a recovery? As the old adage goes: history rarely repeats itself, but it often rhymes. So, let's take a look at the history of commercial property prices and see what we can learn.
During the global financial crisis of 2008 and 2009, which some people now refer to as the GFC, commercial property prices fell for nine consecutive quarters, declining most steeply in the fourth quarter of 2009 at an annual rate of 30%.
Now, today, unlike the post GFC era, when the Federal Reserve brought interest rates to near zero, the Federal funds rate has increased markedly over the last year and a half. So, at least as it relates to the interest rate environment today is different than the post GFC era.
Many believe, in part due to the regional bank crises from earlier this year, that the savings and loan crisis (or S&L crisis) of the late 1980s and early 1990s is a better historical analog to today. I talk about this in more detail in this blog post.
During the S&L crisis, commercial property prices fell for six consecutive quarters, declining most rapidly in the second quarter of 1992 at an annual rate of 11%. So, in the S&L crisis, commercial property prices fell for a longer duration of time, but at a less severe rate of decline than during the GFC.
Yet other research suggests that public equity reach share prices can provide information about future private property prices. And the idea goes something like this: since equity rich shares are publicly traded, they can more quickly incorporate new information than can private property markets, in which a building must actually be sold in order to reflect a price change.
Over the last 50 years, equity rich share prices have roughly tracked private property prices, albeit with greater volatility. However, there are two notable exceptions to this trend.
First, in the first half of the 1970s, which was an inflationary period that's been compared to today, equity rich share prices declined while private property prices went up. Second in the latter half of the S&L crisis, so in the early 1990s, again, a period that's been compared to today, the inverse happened. Equity rich share prices increased while private property prices declined. Today, both reached share prices and private property prices are falling.
Today's CRE market dynamics may rhyme with prior times, but none of the three historical examples we just looked at perfectly matched today's environment. So, what have we learned from this history? Well, first, periods with commercial property price declines can last several years, and we're only about three quarters into the current period of decline.
And second, REIT share prices do tend to lead private property prices. However, in prior periods, with rapid interest rate increases such as ours today, this trend has diverged. Therefore, caution is warranted in assuming that equity reached share prices will continue to lead private property prices, even though they have so far in the current downturn.
Interested in learning more about CRE price trends? Check out my recent article, The End of the Beginning for the CRE Adjustment. And no, I did not just misspeak. You can find this article on First American’s Economic Center.
Additionally, I'll be giving a talk about the state of the CRE market and a 2024 outlook in Miami on October 12th. If you're interested in attending, please reach out to your local first American representative.
Lastly, I'll be a moderator on a panel at Bisnow Annual Multifamily Conference on November 21st in Los Angeles. I hope to see you there.
