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Boston Commercial Real Estate Gains from 2005-2007 Wiped Clear in 2009?

Portfolio Research has published some mean numbers that indicate that we're going to be in for a wild ride over the next couple of years in the Boston area commercial real estate market.  As much as what I hear around town is a false sense of hope and security that this will blow over soon and we'll get back to prosperous times again, it looks like the coming storm is going to get nasty.  Here's what Loopnet quoted:

PPR expects property values across all sectors to continue falling through at least 2010. Multifamily will lead the decline, registering a 32 percent drop between 2007 and 2010. Office will fall 31 percent during the period, retail 29 percent and industrial 21 percent. Click Here.

The early stages of this correction began in early 2007 as speculative investment continued while the tenant market began to show early signs of softening.  One fundamental was at work in our market area and among our clients: landlords cutting deals with tenants that were 20% below actual values.  These deals were under the radar but represented a monumental shift in values, or phase 1 of the downturn. Imagine a landlord with a 20,000 SF building who was charging $10/SF NNN for his space.  He was generating $200,000 in net operating income. On a 7 CAP he's worth $2,500,000.  He then signs a new deal at $8/SF NNN, or 80% of his previous rent.  His building, priced on the 7 CAP, is now generating a $160,000 net operating income and is worth $2,285,000, or 9% less than before. Phase 2 kicks in. CAP rates go up.  Investors now say they'll pay a 9 CAP for that deal.  Now his building is worth $1,777,000 or 29% less than before.  Voila. That's what PPR has projected. Phase 3 is yet to come. When that investor's debt matures at the 5 year mark, he needs to go back to the bank and refinance his loan. Guess what, now he's worth 29% less than before and the bank wants him to contribute more equity to decrease his loan to value ratio.  If he doesn't have the cash, partner(s), or credit, his building's up for sale or goes back to the bank.  That's where the last hit in values will come from.  And who really knows how big that's going to be when it happens. Get Your FREE 2009 Commercial Real Estate Market Outlook for the Boston Area. [download id="4"] Your Free Copy About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com. Sign up for free CREFrontline updates, if you haven’t already. It's free and has absolutely no obligations.