CoStar Repeat Sale Indices Show Solid November Gains for Investment-Grade Assets; Steady Improvement For Smaller General Properties
The CoStar National Composite Index of commercial real estate pricing rose for the seventh straight month since last spring as investment-grade sales made solid pricing gains in November 2011, and the level of distressed sale transactions continued to decline during the month.
The composite index rose 0.6% in November from the previous month, with prices now an average 1.8% higher compared to the same period a year ago, according to this month’s release of the CoStar Commercial Repeat Sale Index (CCRSI), which tracks sale pair transaction data through Nov. 30.
November also brought the second consecutive year-over-year increase in the composite index. Last month, CoStar reported that the index rose 2.2% in October from the same period a year earlier, the first year-over-year improvement in the composite since the U.S. economy took a dive in 2008.
The national General Commercial and Investment-Grade indices both rose over the previous month for the seventh consecutive time since May 2011, boosted by a stabilizing commercial property recovery during the second half of the year.
Despite the gains, the real estate recovery continues to be less robust than previous economic cycles, with the composite index remaining 31.8% below its August 2007 peak during the height of the real estate boom.
The investment-grade index recorded a solid 2.2% increase in November, however, based on 105 sale pair transactions, with average prices now 6.4% higher than the same period a year ago. The general property sales index rose slightly by 0.3%, with prices up 1.1% from the year-earlier period based on 633 transactions.
Editor's Note: Download the latest CoStar Commercial Repeat Sale Index and browse an archive of past releases.
"This modest-but-steady recovery largely reflected the impact of improving market fundamentals, which have continued to attract investors and buyers despite a lending environment for smaller properties that has remained constricted," according to the CoStar report.
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While the 738 repeat sale pairs in November was slightly lower than the one-year average, transaction volume remained stable and the deal size was 15.8% larger than the year's average. Deal counts are expected to rise slightly in coming months as CoStar records additional sale closings.
In addition to benefitting from improved occupancy, absorption and rents in most property types, rising investment-grade sale prices also reflected a less-constrictive environment for real estate financing. The ongoing process of repositioning CRE portfolios and recapitalizing mortgage loans has also favored the higher-quality assets over the last year.
While still high by historical levels, the percentage of transactions that sold under distressed condition has fallen from 35.4% of all transactions in March to 24.5% in November. The ratio of distressed sales fell sharply from 53% of all investment-grade deals in March 2011 to 22% in November. Significantly, distressed general property sales fell from 33% in March to 25% in November 2011, another sign of the broadening recovery and easing of downward pressure on prices.
However, the overall level remains high and distress continues to be a significant factor of property pricing, CoStar analysts said.
"We believe that broad-based rental growth and wider availability of real estate financing are necessary to sustain and accelerate the recovery," CoStar said in the report. "Although distress sales gradually declined over the past eight months, the overall level was still high, suggesting that distress continues to be a significant factor of CRE pricing."
In addition to the national Composite, Investment Grade and General Commercial indices, which are reported monthly, CoStar releases quarterly updates on 28 sub-indices, including breakdowns by office, industrial, retail, and multifamily property sectors; by region, transaction size and quality, and by market size.