Study: Real Estate Woes Move into CRE

Residential real estate woes are spreading into commercial real estate markets across the nation, with a report released Tuesday morning showing a 17 percent annual decline in the number of environmental site assessments conducted across the U.S. in the third quarter.

The data, released as part of a report from Environmental Data Resources Inc., is a key leading indicator of overall CRE market health; phase I environmental site assessments (called ESAs, in industry speak) are a standard pre-closing activity for many commercial real estate transactions. And the state of CRE may be worse than the data indicate, as well — the impact of the downturn in commercial real estate transactions on Phase I ESA volume was tempered during Q3 in part by the fact that site assessments are also conducted for foreclosures (which are increasing as loan defaults rise).

Regionally, the slump in Phase I ESA volume was steepest in the Western region, which experienced a 25 percent decline in activity between the second and third quarters. The Northeast was the only region to register positive quarter on quarter performance, at 11 percent. This positive trend, however, represents only 4 percent of total U.S. Phase I ESA activity, according to the report.

Early indications are that market conditions are going to get worse before they get better, EDS reported. In October, a month that historically sets the pace for the commercial real estate market through the end of the year, “preliminary results show a 21 percent decline [in Phase 1 ESA volume], so the market could be in for a rough ride as 2008 closes,” said Dianne Crocker, senior economist and managing director of EDR’s Market Research Group.

“While the impact of the credit crunch first manifested itself on the residential side, it is now having a dramatic impact on commercial real estate,” said Crocker. “Virtually no region is unaffected by the financial crisis. The most significant declines are areas associated with a high rate of residential foreclosures, such as southern Florida, Arizona, Nevada and certain areas of California.”

Only a select few metro areas posted growth. Metro results ranged from an uptick in Phase I ESA activity of 46 percent in Washington, DC this past quarter, likely due to opportunistic investing, to a contraction of 44 percent in Oklahoma City, according to the data in the report. The fastest-growing metros after Washington, DC were Boston (40 percent) and even the Inland Empire, Calif. (28 percent).

During the time period covered by the report, no commercial property type was immune to the effects of the tight credit market. Office and retail sites were associated with the most severe decreases in Phase I ESA activity, however, with 30 percent and 28 percent declines in environmental site assessments, respectively.

“It is important to note, that Phase I ESAs are only one type of environmental due diligence option,” Crocker said. “Although the number of Phase I ESAs in the U.S. is declining along with the number of commercial real estate transactions, the amount of environmental due diligence being conducted overall is increasing due to the intensely risk-averse nature of today’s real estate market and tighter lending standards.”

For full results of the study, visit http://www.edrnet.com/scorekeeper.

Sidenotes: The EDR study dovetails with recent data from the Mortgage Bankers Association, which found that commercial and multifamily mortgage loan originations remained low in the third quarter. The trade group reported Q3 loan results earlier this week, available here.

Write to Paul Jackson at paul.jackson@housingwire.com.

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