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Commercial Real Estate Prices Up as Foreclosures Threaten Recovery

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US commercial real estate prices as measured by Moody's Investors Service/Real Estate Analytics, Commercial Property Price Indices (CPPI) increased for the second month in a row in December, rising 4.1%, as the commercial real estate (CRE) market continues to face several challenges, such as the rising tide of defaults and subsequent foreclosures. In Scottsdale, Ariz., CRE developer International Capital Partners (ICP) is facing foreclosure on two of its premier office buildings, the Phoenix Business Journal reports. Camelback Tower and Camelback Executive Park, located in western Scottsdale, are scheduled for trustee sale April 1. The properties were intended to be a part of the District at Camelback mixed-use development, along with two other buildings, the Journal said. It’s the latest in a string of property disputes ICP has dealt with since the credit crisis began. ICP Chairman Tom Donahue told the Journal his firm is in negotiations on a number of Arizona properties, including the Camelback buildings, which he said he believes the company can keep its hands on. The firm, while headquartered in Arizona, also has offices in Colorado, Montana, Texas and London. When housing collapsed in the greater Phoenix area, CRE’s failure wasn’t too far behind. Scottsdale Mayor Jim Lane said CRE issues aren’t limited to ICP’s troubles. “There’s a few thousand developers who have encountered problems. My role is not to criticize. The fact is that, at the height of the market, developers could hardly make a mistake,” Lane told the Journal. Moody’s said the index’s improvement was the largest month-over-month increase in the nine-year history of the CPPI and followed a small, 1% gain in November. The volume of transactions also rose in December, typical for the end of the year, Moody’s added. In December, 716 transactions totaling $9bn were recorded in the month. At the end of December, CRE prices are down 29.2% from a year ago and 39.8% from two years ago. They are 40.8% below their peak values. But, Moody’s said, it’s uncertain whether the recent price increases represent CRE passing the bottom of the market or are only the “volatility of a market in transition.” “Although we are unable to conclude that the bottom to the commercial real estate market is here, we do believe that the period of large price declines is over,” said Moody's managing director Nick Levidy. “We will need to see data from the first few months of 2010 to develop a better picture of where things stand.” While the large price declines may be over, the mounting foreclosures left in the wake of those losses still have to be processed through the system. In Denver, three local CRE firms have partnered to establish a distressed CRE disposition firm, according to the Denver Business Journal. LC Fulenwider, Bitzer Real Estate Partners and Real Estate Generation (REGen) reportedly formed American Property Solutions (APS). APS’ services include work as property receivers and trustees, property and construction management, accounting and brokerage and leasing services Moody’s said its quarterly national property type indices show three of the four major property types recording price gains in the Q409. Offices had the largest gain, at 7.9%, while apartments improved 7% during the quarter and industrial increased 5.6%, Moody’s said, adding retail was the only major sector to decline, at 1.5%. While the year-end results were an improvement, the annual decline in CRE sector prices ranged from 19.0% to 23.2%. In the top-ten metropolitan statistical areas (MSAs), apartment prices fell 2.1% in Q409 and industrial prices were down 2.8%, Moody’s said. Retail prices increased 3.1% during the quarter, while offices — which declined almost 20% in the Q309 and 10% in the Q209 — were up 26.8%. The top 10 MSAs account for about 50% to 80% of the transactions in the national property type indices, Moody’s said. However, in the West, prices have fared better than the national average in three of the four price indices, the office sector being the lone exception. Western office prices fell 25.5% in 2009, compared to the national office annual decline of 19.8%, Moody’s said. Even further west, in Hawaii, the dollar volume for the top 10 transactions increased significantly over 2008, according to an analysis by the Honolulu-based Pacific Business News. The total dollar volume for the 10 largest transactions last year was more than $233m, the publication said, up $91m, or 64%, from the more than $142m generated by the 10 largest transactions of 2008. While a significant increase, it still pales in comparison to the $1.1bn generated from 2007’s Top 10 transactions. Write to Austin Kilgore.

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