Real estate woes spreading to commercial property

Posted by: Aaron Pressman on November 14, 2007

The interconnected housing price and mortgage lending bubbles that have now popped with such devastating consequences haven’t exactly crushed the commercial real estate world — at least not yet. Today, troubling news from MIT’s Center for Real Estate. The center maintains an index of the current value of commercial properties owned by pension funds. And guess what happened in the third quarter? The index dropped 2.5%, the first quarterly decline since 2003. And prices haven’t declined as steeply since the fourth quarter of 2001, when they dropped 3.9% after the 9/11 terrorist attacks.

“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,” David Geltner, the center’s director, said in a release accompanying the index report.

The report notes that commercial property values had continued to rally even after home prices peaked in the middle of last year. The index was up almost 20% in the year through June 30, 2007, MIT says.

Real estate investment trusts that hold commercial property have been a haven of sorts amid the residential property melt down. Boston Properties (Symbol: BXP), which owns office buildings in Boston, D.C., New York, Princeton and San Fran, is down only 7% this year and has actually gained 6% in the past 3 months. Industrial property owner ProLogis (PLD) has gained 16%.