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CRE Pricing Growth Accelerates Beyond Multifamily Sector, Expanding Into Secondary Markets

CoStar CCRSI Records Strong Across the Board Pricing Gains for Commercial Property in September 2012
November 14, 2012
Pricing for commercial real estate closed out the third quarter with strong gains, according to the CoStar Commercial Repeat Sale Indices (CCRSI).

The two broadest measures of aggregate pricing for commercial properties, the CCRSI's U.S. Value-Weighted Composite Index and the U.S. Equal-Weighted Composite Index, both posted significant gains in September 2012. The U.S. Equal-Weighted Composite Index increased 9.7% and the value-weighted index rose 8.2%, on a year-over-year basis.

In addition, the Investment Grade and General Commercial indices of the CCRSI both advanced in September, signifying a broadening recovery in commercial property pricing.

The equal-weighted General Commercial Composite Index, which reflects the pricing influence of sales of smaller, less expensive properties, increased by 4.3% in the 3rd quarter 2012, the largest quarterly gain recorded since the start of the recession.

September prices were also up an eye-popping 15.4% from one year earlier in the U.S. Investment Grade Index. With the September increase, the high-end property sector is approaching pricing levels not seen since early 2009.

While the increase partially reflects the larger recovery in property pricing, Chief Research Officer Dr. Ruijue Peng, primary author of the CCRSI, noted that the investment-grade market may also be benefitting from a seasonal pricing pattern observed over the last several years in which investment-grade transaction activity tended to spike during the last few months of the year.

In past years, the corresponding late-year pricing gains in the Investment Grade index receded in the first quarter as deal volume slowed, a pattern expected to repeat itself in 2013.

In other welcome news for CRE investors, distress levels among property sales continued to decline in September. Only 18.1% of observed trades in September 2012 were distressed, a level notably lower than the 28.8% average over the past three years.

According to Dr. Peng, the drop in distressed deal volume should lead to higher, more consistent pricing, and may also improve liquidity conditions by giving lenders more confidence to finance deals.

CCRSI Property Type Results
Not surprisingly, the multifamily sector continued to lead all other property types in price gains for the third quarter of 2012. The CCRSI Multifamily Index advanced by a cumulative 31.9% from December 2009, through the third quarter of 2012, putting this sector just 17.4% below its peak pricing level reached in 2007.

The CCRSI Office Index also increased from year-ago levels, rising 6.5% as office-using employment growth outpaced overall employment growth during the past year, attracting a return of capital and a subsequent rise in pricing.

The CCRSI Industrial Index posted its second consecutive quarter of pricing gains, and also the highest pricing gain since the beginning of 2012.

Investors in search of higher yields may be contributing to the acceleration in price index growth seen in the office and industrial markets since the start of 2012, as a result of the low capitalization rates in the multifamily sector.

Hotels also appear to becoming a more desirable asset class among investors, as the Hospitality pricing index increased by a cumulative 16.3% since the beginning of 2012 after suffering the steepest cumulative price losses among all the property types.

Even pricing for land is finally beginning to pick up thanks to a strong multifamily and stabilizing single-family market. The Land Index gained 6.3% in the third quarter of 2012, but is still 42% below its peak in December 2007.

Only the retail property sector managed to see little in the way of pricing gains. As of September 2012, the Retail Index advanced by 6.3% since the beginning of the year, although pricing remains nearly a third below the peak of the previous cycle.

Editor's Note: For more pricing analysis, including trends in the four major U.S. regions and prime markets by property type, see the full CCRSI release.

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