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CRE Pricing Strengthens As Buyers Expand Targets To Include Smaller Properties, More Markets

CoStar Composite Index: Stronger Absorption, Leasing Translate Into Less Distress And Stronger Pricing Across The Board For Commercial Properties
January 16, 2013
November brought modest improvement to commercial real estate pricing as investors appeared to put the uncertainty -- temporarily at least -- of the nation's fiscal issues and U.S. elections behind them.

The two broadest measures of aggregate pricing for commercial properties within the CoStar Commercial Repeat Sale Indices (CCRSI), the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index, gained respectively by 0.9% and 1.1% in November.

The survey of property pricing for November is based on 929 repeat sales during the month, and more than 100,000 repeat sales compiled by CoStar since 1996, according to the report and its principal author, CoStar Chief Research Officer Dr. Ruijue Peng.

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

The U.S. Value-Weighted Composite Index, which weights each repeat-sale by transaction size or value and therefore heavily influenced by larger transactions, rose 6.2% over the last year and has now increased 38% from its pricing bottom in 2010.

The strong improvement reflects sturdy investor demand for core markets and assets that have been at the forefront of the pricing recovery for commercial property.

Within the Equal-Weighted Index, the General Commercial segment saw healthy gains in November over the previous year. The equal-weighted measure weights each repeat-sale equally, reflecting the influence of smaller transactions.

While general commercial pricing bottomed much later than the Investment Grade segment, the smaller property index has made strong gains over the last year and is now up nearly 10% from its nadir in the first quarter of 2011.

Investors are increasingly branching out to second-tier markets and assets as prices for premium assets in top markets have become extremely competitive, the recent gains suggest. That said, the November decline in the investment grade index is mainly a correction of a seasonal surge in sales activity in prior months.

One of the main drivers behind the index growth is the fourth-quarter resurgence of aggregate net absorption of office, retail, and industrial space after a lackluster turn in the third quarter. Both the general and investment-grade segments experienced a boost in leasing activity stemming from healthy absorption numbers, indicating a broader and more sustained real estate recovery.

At the same time, the percentage of CRE properties selling at distressed prices slid to 14.5% in November 2012, the lowest rate since mid-2009, as absorption, leasing and other fundamentals heated up.

In additional to the monthly U.S. composite index of general commercial and investment quality repeat sales, CoStar next month will report the fourth-quarter and end-of-year index results for 2012, which will include 30 sub-indices in the CoStar index family broken out by property sector, geographic region, transaction size and quality and market size.
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