Prices of office buildings and industrial properties are falling for the first time since the financial crisis, according to Moody’s Investors Service.

The Moody’s/RCA Commercial Property Price Indices (CPPI) national all-property composite index decreased 0.3% in January from December, led by a 0.8% decrease in core commercial prices. Prices of apartment building rose by 0.7%.

Office and industrial property prices each declined by more than 1% in January, driving the first monthly CPPI decline in six years.

Retail was the only core commercial sector to show a gain in January, up 1.1%.

The Moody’s/RCA CPPI1 measures price changes in U.S. commercial real estate based on completed sales of the same commercial properties over time, known as the “repeat-sales” methodology.

The price slippage in January follows flat performance in December.

“These results indicate that price growth has paused six years into the post-crisis recovery,” Moody’s stated in a press release. “This is a significant milestone that signals that a shift in sentiment among commercial property investors is underway.”

This shift may have been caused by, or contributed to, a steep selloff in bonds backed by commercial mortgages and slows down in issuance of mortgage bonds during the month of January. The slowdown in activity is raising questions about the ability of borrowers in certain parts of the country to refinance billions of dollars of maturing loans on office buildings, hotels and shopping centers.

It comes as some $100 billion of commercial mortgages that serve as collateral for mortgage bonds, most of them made just before the financial crisis, are due to mature this year. Most commercial mortgages have terms of 10 years and are structured with a large “balloon” payment at the end of their terms, allowing for little amortization.

Loans on properties in secondary and tertiary markets are considered to be most at risk, because borrowers in these markets rely on commercial mortgage bonds for financing.

For now, however, it is price growth in major markets that is decelerating. Prices in Boston, Chicago, Washington DC, Los Angeles, New York and San Francisco declined by 0.6% in January and have gained only 0.1% over the past three months.

Non-major market prices outpaced major market prices over the last one and three months, a relatively rare occurrence given that major markets outperformed non-major market prices over all time frames of six months or longer.

If commercial mortgage financing evaporates, many properties in major markets could attract financing from insurance companies.

Property prices are leveling at a time when indebtedness is as high or nearly as high as it was January 2007, near the peak of the pre-crisis lending surge. On average, loan-to-value ratios of suburban offices are higher and retail and industrial LTVs are slightly lower than they were in early 2007, adjusted for the CPPI. Apartment and central business district offices prices had significant appreciation since January 2007 and show significant deleveraging based on current prices.

Among the core CPPI sectors, only suburban office shows an LTV ratio higher than January 2007. Retail and office properties built up modest equity cushions that have lowered their LTV ratios by about 2.0 to 5.0 percentage points. Apartments and CBD office experienced significantly more appreciation than the other sectors since January 2007 and, on average, have improved their LTV ratios by between 20 and 35 percentage points. Individual property performance, of course, can vary significantly from the CPPI average, based on supply and demand changes in the local market and in the tenant roster.

Moody’s CPPI is not the first reading on the U.S. commercial property market for January. The CoStar Commercial Repeat Sale Indices (CCRSI), which 977 repeat sales and was released Feb. 25, also indicated that investment activity in commercial real estate cooled. Both the equal-weighted and value-weighted indices slowed in January from the robust pace of the last three months of the prior year. The equal-weighted U.S. Composite Index declined by 0.3% and the value-weighted U.S. Composite Index increased by 0.6% in January 2016, after both indices posted average monthly growth of 0.8% in the period from October through December 2015.  

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