An already struggling commercial real estate industry took a sharp turn for the worse in the fourth quarter of 2008, according to Environmental Data Resources, Inc.trend data published this week. EDR's ScoreKeeper(TM) index of environmental site assessment volume fell nearly 20 points from 81.3 at the close of the third quarter to only 62.7 by year end, reflecting the weakest quarterly performance of the year. On a monthly basis, the index hit a three-year low in November at 51.7, a drop of 70 points compared to the March 2006 peak of 121.7.

Because Phase I environmental site assessments are a standard pre-closing activity for many commercial real estate transactions, this data is a leading indicator of the overall health of the commercial real estate market in areas across the country. The fourth quarter ScoreKeeper results are consistent with a commercial real estate market that has held up better than the housing market, but began to struggle late last year as banks were forced to write down the value of their real estate assets. Recent data reflect the hit that the real estate market took in late September when powerhouses like Lehman Brothers, AIG and Merrill Lynch toppled, and a new level of fear took hold as investors and lenders pulled in their horns.

"In the fourth quarter of 2008, an already skittish market worsened," observed Dianne Crocker, EDR's senior economist. "In fact, the decline in environmental site assessments, while steep, was not as dramatic as the drop in commercial real estate transactions. Demand for environmental assessments is being sustained to some extent by a significant increase in the number of foreclosures from loan defaults and workouts as regulators sort through the real estate assets of the growing number of failed banks."

During the quarter, environmental site assessment activity declined in virtually all of the 100 metros modeled in ScoreKeeper. "No geographic area has been immune to the impacts of tighter credit conditions and the weakening economy," noted Crocker. Declines ranged from a moderate 1% in Boston, Mass. and Indianapolis, Ind., to a much more significant contraction of 56% and 60% in Sacramento, Cal., and Melbourne, Fla., respectively.

"Recovery in commercial real estate will eventually take hold," Crocker added, "and when it does, it will be interesting to see which metros recover faster than others so that environmental firms, developers and investors can position themselves in the areas where activity is the strongest. The first quarter of 2009, which is already off to a slow start, will be very telling, particularly as details of the Obama administration's strategy for jumpstarting commercial real estate lending and dealing with toxic real estate assets on banks' balance sheets begin to emerge."