Pricing Recovery Broadens Across CRE Property Spectrum

Posted on July 20, 2012

Commercial real estate pricing continued to recover through May 2012 at a fairly surprising pace across the board given the disappointing level of U.S. job growth and other economic factors, with gains expanding from the best institutional-grade buildings to smaller and more general quality properties.

The two broadest measures of aggregate pricing for commercial properties within the CCRSI that comprise the equal-weighted U.S. Composite Index, which tracks investment grade and general commercial sale prices, each posted gains in May over year-ago levels, based on 853 repeat sales recorded during the month and more than 100,000 repeat sales since 1996, according to July’s CoStar Commercial Repeat Sale Indices (CCRSI) report.

In another promising sign for the investment market and prospects for firmer pricing, the percentage of commercial properties selling at distressed prices in May was the lowest since mid-2009. Rising occupancy levels in most markets and increasing rents in the multifamily sector have dampened the overall level of distressed trading, helping lift commercial property pricing.

Both the U.S. Value-Weighted Composite Index and the U.S. Equal-Weighted Composite Index posted year-over-year growth in May, a sign that the pricing recovery is reaching across all size and quality categories within U.S. commercial property.

The U.S. Value-Weighted Composite Index weights each repeat sale by transaction size or value and is heavily influenced by larger transactions. The index reached its highest level in more than three years, since early 2009, reflecting the sharpening appetite of investors for high-end assets, especially within primary gateway metro areas and for institutional-grade multifamily assets.

Meanwhile, the 6.6% increase of the Equal-Weighted Composite Index in May over the same month last year was the largest gain since before the start of the Great Recession in 2007. Improvement in the equal-weighted index, which measures each sale pair equally and better reflects the market influence of the smaller transactions that make up the bulk of CRE transaction volume, has picked up speed over the last several months.

In fact, the uptick in pricing shows that demand growth for smaller and lower-quality commercial property assets has caught up with demand for institutional-quality properties in recent quarters. Over the past year, growth in demand has been consistently strong for investment grade, while generally trending up for the general commercial sector.

However, the equal-weighted index has only recovered 8.8% since it reached its trough in March 2011, compared with a 36.1% improvement for the value-weighted index, which bottomed earlier, in January 2010.

Strong leasing activity in technology driven office markets such as San Francisco and Austin, TX and in lower-cost national distribution warehouse hubs such as Chicago and Dallas, TX has driven relatively strong absorption over the past year of institutional quality properties.

A slackening of demand in the retail market eroded the top-line numbers for general-grade properties, despite moderate absorption in the office and warehouse markets in second-quarter 2012.

Randyll Drummer, Costar Group