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CRE Pricing Trends Hold Through 2017 Despite Transaction Slowdown

Pricing Remains in Positive Territory Even as Rate of Increases Slow and Transaction Activity Moderates
January 31, 2018
Healthy economic growth combined with steady demand and favorable interest rates provided a backdrop for continued growth in CRE pricing through the final quarter and the full year of 2017, according to the latest release of CoStar Commercial Repeat Sale Indices (CCRSI) data.

The equal-weighted U.S. Composite Index extended its streak of stronger growth with a 14.7% increase for 2017 and a 0.7% gain for the fourth quarter as the scope of the pricing recovery broadened across the full size and quality spectrum of commercial real estate. The value-weighted U.S. Composite Index rose 5.7% and 0.8%, respectively, during the same periods.

All six major commercial property-type indices, including land and hospitality, posted gains in 2017 and ended the year on a positive note, marking the sixth consecutive year of pricing recovery.

Reflecting the healthy appetite for logistics properties, the Industrial index increased 17.7%, well ahead of the 9.9% pace set over the previous two years as industrial vacancy hit the lowest point of the cycle in 2017 despite a record year for new logistics construction.

The Prime Multifamily Metros Index also increased by a slower 4.2% in 2017, suggesting weaker growth in higher-value apartment properties in primary markets. Rising deliveries and already-elevated pricing contributed to a slower rate of multifamily price growth last year. While a slowing from the prior period in 2015 and 2016, the overall U.S. Multifamily index rose by a still-robust 8.5% in 2017.

The rate of growth decelerated in some property segments and the prime markets indices within each property sector dominated by the larger core coastal metros, generally advanced more slowly than the broader property-type indices in 2017, reflecting heightened growth at the lower end of the market.

Despite a high-profile wave of store closures and retailer bankruptcies that have pressured comparable-store sales, the U.S. Retail Index posted a 10% gain over the year. Store chains targeted less-productive locations for closure as demand for stronger locations remained robust.

The U.S. Office Index increased 5% in 2017, slowing from the average 10.2% growth in 2015-2016, as rental and occupancy rates nationally continued to hold steady. Prices advanced by a slightly higher rate at the top end of the market as the Prime Office Metros Index increased by 8.4% in the 12 months ending Dec. 31.

The U.S. Hospitality Index increased 10.3% in 2017, on par with average gains of 10% in 2015 and 2016. Hotel occupancies remain elevated nationally, supporting continued growth in room rate and revenue per available room growth. Meanwhile, a strong fourth quarter for land sales propelled by demand for development sites buoyed the Land Index by 33.7% for 2017. The index did not reach its trough until very late in the cycle in 2012 and did not regain its prerecession peak until last year.

By region, the Midwest Index advanced 19% in 2017, finally eclipsing its 2006 prerecession peak. The Northeast, West and South regional indices, which had already fully recovered their previous highs, grew by smaller albeit double digits over the year.

Pricing growth continue to a steady clip despite a moderate slowing sales transaction volume from the prior two years across the quality spectrum of CRE properties. Although 2017 composite pair volume was down 3% from the peak pace set between 2015 and 2016, last year's total of $128.1 billion was still the third-highest annual total on record for the CCRSI. The slowing sales volume was felt across the CRE quality spectrum.

Industrial fundamentals remained healthy as vacancy hit the lowest point in the cycle in 2017 despite this also being a year for record construction of new warehouse and distribution space. The U.S. Industrial index advanced 17.7% in 2017, well above its 9.9% average annual pace set in 2015-2016. Core markets remained in favor as the Prime Industrial Metros Index advanced by a similar 16.6% in 2017.

The full Fourth-Quarter 2017 CCRSI report can be reviewed here.

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