Certain “markets” – the word is from the Latin mercari, to trade – are not living up to their name. Determining if the US commercial property market is bad, worse or simply terrible is hampered by the virtual absence of deals since September. With only top-notch property drawing interest for much of this year – forced sales by stricken investor Harry Macklowe, for example, account for nearly a third of business district office sales to date – transactional values were already skewed, masking the maelstrom in bricks and mortar.

Beyond frozen credit, there remains a yawning gulf between would-be buyers and reluctant sellers. Capitalisation rates – a property’s operating income divided by its value – have yet to rise sufficiently to tempt buyers asked to stump up more equity and pay vast spreads even on senior debt. Those relying on price appreciation and a quick sale have departed. With tenancy demand set to weaken, buyers can no longer rely on surging rents to help make the sums add up.

Average cap rates dipped below 6 per cent last year but have risen to about 6.5 per cent on the basis of observed deals. But rates now are probably closer to 7.5 per cent, estimates Green Street Advisors, given poor income growth. There is more pain to come. Cap rates still compare unfavourably with yields on mid-rated corporate bonds, at about 9 per cent. That these have historically been closely linked suggests that cap rates may rise further (that is, prices may have considerably further to fall).

For now, the absence of deals removes one reality check for sellers yet to absorb the market’s shift. Credit constraints will keep buyers on the sidelines. The danger of prices overshooting on the downside may increase as boom-time financing comes due next year. Closing the gap between buyers and seller could then result in a head-on collision.

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