The recession may have turned the corner, according to a recent New York Times article. This is conclusion is based on the index of leading indicators which has "has accurately indicated the end of every recession since the index began to be compiled in 1959." The index has risen each of the last three months, and is now up over 12%; this number has historically been a signal for the end of a recession. The New York Times produced a chart, illustrating the index of leading indicators at the turnaround point for every recession since 1959. This chart is presented below (click to enlarge):
Commercial real estate might defy this indicator rule, however, and prolong this recession. According to Moody's, commercial property prices across the nation have declined 35% since October 2007 and CNN recently published an article titled: "The commercial real estate time bomb" (story here). Meanwhile the delinquency rate on commercial mortgages that were sold as bonds has more than doubled since its 2007 low. As with residential real estate, the problem is inflated valuations. For income producing properties, one way to determine the value is net operating income (before taxes) divided by the capitalization rate (known as the "cap rate"). For a couple decades, these rates hovered around 9.0%, in the most general sense. In the boom of 2004-2007, however, as the federal funds rate hit new lows, cap rates dropped to 6-7% for many property types. If cap rates now revert to their historic norms, properties acquired or built during the boom could be overvalued by 30-50%, and therein lies the problem for commercial real estate.
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