IAP Political Forum

This bodes ill:

MIT index shows first drop in commercial property value since '03
Indicates housing woes, credit crunch 'may be spreading'
November 14, 2007

The value of U.S. commercial real estate owned by big pension funds fell 2.5 percent in the third quarter of 2007, according to an index produced by the MIT Center for Real Estate.

The drop in the MIT quarterly transaction-based index (TBI) may not only spell the end of a five-year rally that saw commercial property prices effectively double, but it may also signal that weakness in the housing market is spilling over into commercial real estate.

"The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets," stated MIT Center for Real Estate Director David Geltner.

The TBI decline in the third quarter of 2007 marks its first quarterly downturn since the third quarter of 2003, when prices fell 2.4 percent. The last time prices fell more than in the third quarter of 2007 was in the fourth quarter of 2001 (9/11, recession), when they fell 3.9 percent.

Against a backdrop of more than a year's worth of housing price declines and an international credit crunch that erupted over the summer, analysts have been seeking clues about whether other markets and sectors of the economy--including commercial real estate--would be impacted.
http://web.mit.edu/newsoffice/2007/commercial-1114.html (http://web.mit.edu/newsoffice/2007/commercial-1114.html)

If commercial real estate doubled in 5 years, there is absolutely a bubble to burst here.
They had to avoid overpriced assets. Mortgage backed assets (MBAs) and CDOs were also largely overpriced.

It's a replay of the dot.com bubble.
That led to a recession indeed. Thought in this case, the debacle is not caused by a coming recession but by bad investments.

The good thng is that unlike dot.com virtual ventures, real estate rarely lose value in the long term, and almost never in the very long term. While that doesn't give hope for MBAs, all the marked losses in pure real estate ownership will inevitably recover. Real estate is still a stronger base than a dot.com, even if prices have been inflated.