Commercial Real Estate Finally Starts Moving

Meanwhile, distressed properties plummeted by 10% to a new low 62% below their peak.  (The middle part of the market went down, too, but only by 2.4% and is still 8% above its low point.)

The positive force, then, is the strong recovery already underway in the higher-quality, non-distressed part of the CRE market. 

For example, Green Street Advisors—whose index measures only properties owned by publicly traded REITs, which tend to be the high-quality end of the market—cites “a quicker-than-expected rebound in fundamentals in some major property sectors.”

The negative force is the tidal wave of distressed sellers, many of whom may be forced to put their assets up for sale in the next several quarters. 

Whether an index like those from Moody’s/REAL or CoStar goes up or down in a given month will continue to depend mostly on whether the distressed sales outweigh the non-distressed sales.

REIT investors need to understand that both forces are good news for REIT earnings.

When Green Street reports that the values of REIT-owned properties have recovered 30% from their low point, it’s because occupancy rates and rent growth have already started to improve. 

Conversely, when Professor Geltner notes that distressed properties are at a new low, it means that publicly traded REITs—which have an advantage over other CRE investors in the form of better access to capital—are increasingly acquiring quality properties at bargain prices, which means adding to future earnings growth.