How much do values drop in a commercial real estate downturn?
So how large of a drop in values will we see in the next downturn in New Hampshire and greater Boston, Massachusetts commercial real estate? Who knows how much values could go down in the next downturn. But we generally know that values do tend to go down in a downturn primarily because investors pull back, they are trying to mitigate risk and they want to pay lower prices for property because some condition in the market’s changed.
A condition could be the availability of financing. A condition could be tenants and their ability to pay rent or a contraction in their demand for space. It could be that properties are too expensive and the downside risk outweighs the upside reward. So how do you quantify that? Well, it’s really hard to do that, but what I found is going back and looking at prior cycles to see how rates have changed. So going back to 2008 to 2010 which was the last great recession we went through, we tracked market data and what we do is we look at the average price per square foot for properties that sold running up to the downturn, through the downturn and out of the downturn.
Boston Office, Industrial, & Retail Properties in a Downturn
So we break down office, retail, flex, industrial, you can do it for land, hospitality, multifamily properties. So you take the data, you look at what the average trade was by year, by property type, and then you can run that data through those years and then look at the delta. So what did we find from 2008 to 2010? Okay, if you sold at the peak of the market at the end of 2007 and if you compare it to selling at the bottom of the market in 2010, it would have cost you 30.3% of your property’s value. Guess what? People did sell. In fact, people keep selling through all market cycles, but there were far fewer transactions. You had higher transaction volume in ’07 than you had in 2010.
The Mass Commercial Properties Market Corrected 30.3%
But that 30.3% figure is valuable because what it tells us is that on average across all those property types that I just mentioned, a third of the value went out the window, but it didn’t stay that way. In fact, it came back. 2011, ’12 and ’13, the values came back up and in 2013 they ramped up very quickly to today. So if you’re trying to figure out what the next one’s going to cost or how the values might decline, the best thing we can do is look back and see how values change in that environment. By the way, one more tip, when you do that, you’re going to see that some property values declined more than others. What we found was that from 2008 to 2010, if you had an industrial building that you sold in ’07 versus you sold in 2010, you only lost about 10% of your value.
What Will be Different in the Next Commercial Real Estate Downturn?
That’s probably going to be different in the next downturn because industrial has expanded so much, but office costs 48%. So it changes based on the property type. So one of the things you want to make sure you do is you can look at a consolidated view of value, but you can also break it down by individual property type value. That way you’re segmented, you’re sharp, and you can be prepared for the next market change.
Get more insights into downturns in the greater Boston, Massachusetts and New Hampshire commercial real estate markets here.