LoopNet Market Weakens

The Federal Reserve released its Beige Book this week, and the news for LoopNet (LOOP - Snapshot Report), which operates an online marketplace for commercial real estate, remains challenging.

Commercial real estate transactions remain at historically low levels, and we expect this trend to continue to put pressure on LoopNet’s operations.

The Fed noted that "commercial real estate markets continued to weaken across all Districts." This is certainly not a positive sign for LoopNet’s business, and the lack of transaction activity is our primary concern regarding the company’s outlook.

This lack of commercial purchases and sales stems not only from lack of demand, but lack of available capital. According to the Fed, "eight Districts cited difficulty in obtaining financing as one of the primary reasons for delaying or stopping construction of new developments and for limiting sales of existing properties." This fact is troubling, as it indicates that even if asking prices continue to fall, prospective buyers may still have difficulty in lining up adequate financing.

The Richmond District noted the impact on both sellers and buyers, stating that "reduced property values were discouraging sellers from listing properties, and a lack of affordable financing was deterring buyers." As a result, the District said, "commercial sales activity remained subdued."

The lack of volume is apparent in major markets around the country. In Boston, for example, the Fed reports that "commercial real estate transactions were increasingly scarce." The situation is even worse in Dallas, where the Fed mentioned "sales transactions for commercial real estate properties are almost nonexistent."

Importantly, the Boston District reported that "financing volume for smaller commercial deals (priced below $10 million) slowed considerably through April and May, to a pace roughly half that observed in the first three months of 2009." The District noted that previously, demand for smaller deals had remained robust even while volume remained very slow for large properties.

Given the widespread deterioration in transaction volume, as well as the ongoing competition from industry peer CoStar Group (CSGP - Snapshot Report), we continue to have a negative view of LoopNet’s outlook. The shares have fallen roughly 7% since our last post in April, and we maintain our Sell rating on the shares.

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