Commercial real estate prices dropped 10.5% in the first quarter, according to U.K. data provider IPD's first report on the U.S. real estate market. The firm said the decline followed a 12.2% drop in 2008.
Commercial real estate fundamentals in tech-centric markets such as San Francisco, New York and Silicon Valley are starting to cool, with demand set to drop for multifamily and office space. Another sign of moderation is the growing sublease space in these markets. Balancing things out, other companies such as Apple, Uber and IBM have commitments to expand their space.
Commercial and residential real estate mortgages played a big part in depressing the share prices of the worst-performing public companies on the Standard & Poor's 500 index in 2009. As of Wednesday, Marshall & Ilsley had dropped 60%, Huntington Bancshares was down 52% and Citigroup was off 51%. Banks in the U.S. struggled to limit losses on commercial real estate loans as the worst recession since the 1930s made it difficult for business owners to cover their debt service.
The national economic recovery might be offset by a flood of expected commercial real estate loan defaults. Still, the outlook for defaults might not be as grim as originally projected. "Things are not rosy, but the outlook for commercial real estate as the next shoe to drop after the residential mortgages just really isn't what we see," said Steven Buster, president and CEO of Mechanics Bank.
China's commercial real estate market is performing above expectations. A report from Real Capital Analytics showed China topped the U.S. and the U.K. in combined commercial property sales during the first six months of 2009. "There's no question that China will be a more significant player on the world stage for commercial property transactions vs. other Western countries," said Dan Fasulo, Real Capital's managing director.
Brokerage activity in the commercial real estate sector dropped 4.8% between the end of the fourth quarter and the end of the first quarter, according to data compiled by the National Association of Realtors. "Because commercial real estate always lags an overall economic recovery, it will take some time for the commercial real estate market to rebound," said Lawrence Yun of the National Association of Realtors.