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CRE Prices Rebound In October

Resolution of Government Shutdown and De-Escalation of Debt Ceiling Debate , Plus More Clarity Over Fed Tapering Policy, Helped Commercial Property Prices Continue Upward Trajectory
December 11, 2013
Commercial property prices resumed their upward trajectory in October as concerns eased over Federal Reserve stimulus tapering and government fiscal policy and commercial real estate fundamentals continued to improve.

The value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index, the two broadest measures of aggregate CRE pricing within the CoStar Commercial Repeat Sale Indices (CCRSI), rose by 1.1% and 1.4%, respectively, in October, according to the latest CCRSI report released this week.

As the market cycle shifts from recovery to expansion mode for most property types, pricing has firmed at both the high and low ends of the market. Transaction activity continues to improve and distress sales volume has fallen to its lowest level since 2008.

Meanwhile, vacancy rates across all four major property types have nearly returned to their historical averages. With the exception of the multifamily sector, construction remains historically low.

The value-weighted Composite Index, which is influenced by larger, higher-quality property transactions, has advanced by 9.5% on an annual basis, while the equal weighted Composite Index, influenced by the many more numerous smaller deals, has risen by 7.4%.

The General Commercial segment within the equal-weighted index, which includes lower-tier properties, gained 1.4% in October and 7.1% for the year. The Investment Grade segment increased by 0.8% during the month but is up 9.8% from a year ago.

In particular, the recovery of the suburban office sector reflects this broad increase in pricing across all building quality levels. Suburban properties posted a 15% pricing gain, compared with 8% in central business district assets, over the last year.

Sales liquidity continues its marked improvement in 2013, with the year-to-date repeat-sale transaction total for 2013 up 16% from the same 10-month period last year.

The general commercial segment has logged a 17% increase in total property trades while investment-grade deals are up 11% as investors search everywhere for pockets of yield -- from primary to secondary markets and even some third-tier markets.

Other liquidity metrics also saw improvement in October. The average time on the market for properties fell 6% in October to 417 days from its 2012 cyclical peak of 443 days.

The narrowing spread between asking and bidding prices also continues to tilt in favor of sellers. In October, sold properties traded at an average of 88.4% of their asking price, up from just 84.6% at the low point in early 2012.

Also, properties withdrawn from the market by sellers declined 1.3% in October from the prior year.

Finally, the share of properties selling at distressed price levels dropped to 10.7% in October from nearly 20% in October 2012, the lowest level since December 2008.

While the latest CCRSI report notes that the major liquidity indicators have not yet come back to pre-recession levels, the trends bode well for a continued recovery in pricing.

As prices for core assets have appreciated and market conditions continue to improve, lenders have become more willing to assume added risk in providing financing for buyers hoping to pick off distress properties at lower prices.

In stronger markets such as San Francisco, Boston, Los Angeles, Seattle and New York, the share of distressed sales fell into the single digits in the third quarter of 2013.

However, distress still varies widely by market. Distress deals still accounted for more than 20% of all sales in third-quarter 2013 in such housing bust markets as Atlanta, Las Vegas and Orlando, suggesting there's more opportunity for prices to rise in those markets.

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