Illustrating Up-and-Down Recovery, CoStar Analysis Finds Investment-Grade Property Prices Moved Up in August After Dropping for Two Months; General Values Dropped After Moving Up
Composite commercial real estate values reversed their positive trend seen in July and dropped 1.38% for the month of August, according to CoStar Group's newly released CoStar Commercial Repeat-Sale Indices (CCRSI).
This up-and-down pattern is repeated across investment grades as well. While overall values were down in August, the value of investment grade properties and general real estate were heading in opposite directions. General real estate values came down -3.48% in August. However, the repeat-sale values for investment grade commercial property reversed their negative trend from July and moved positive again with a 3.73% climb in August.
Of note, the dollar volumes for both the investment grade and general real estate indices were up approximately 20% in August compared to July. The CCRSI September report is based on data through the end of August.
"Some of this is 'noise' but it is also indicative of the market bouncing along a 'rocky bottom,'" said Dr. Norm Miller, CoStar Group's vice president, analytics. Miller was paraphrasing Dr. Karl Case, who recently described the housing markets in similar terms for his Case-Shiller residential indices.
"One reason for the volatility of these indices," Miller added, "is the proportion of distress sales, which are continuing to climb in absolute levels, although as a percentage of sales they have leveled since June. This volume of distressed sales -- while certainly not a tsunami -- is still significant especially among lodging and multifamily properties."
"We continue to see a significant spread in cap rates and prices from the larger property in prime core markets to the property in second- and third-tier broader markets," Miller added. "Even with tighter financing, there appears to be plenty of institutional and REIT capital oriented to the lower-risk core markets."
For the full CCRSI including indices by property type and regions or for more information about the indices, please visit www.costar.com/ccrsi/.
General Observations from the CCRSI
For the past three months, all three indices (the composite, general and investment-grade) are negative: down 3.92% for the broad general index; down 3.24% for investment grade; and down 3.92% for the composite. For the past 12 months, all three indices are down approximately 10% to 11%.
For the past two years, the general real estate index is down 24%, investment grade is down 32% and the composite is down 26%.
From the peak in February of 2008, the general real estate price index is down 27%, the investment grade down 34% and the composite index down 29%.
The most active buyers continue to be REITs, both public and private, followed by developer/owners and individuals as well as investment managers including some hedge funds.
Since 2007, the ratio of distressed sales to overall sales has increased from approximately 1% to approximately 23% currently. Discounts on distressed property sales (REOs and short sales) compared to non-distressed sales are running an average of 40% for multifamily, 20% for office and industrial and 17% for retail property based on 2010 data to date.
CoStar launched the CCRSI this summer in response to the void within the $11 trillion U.S. commercial real estate industry for effective, non-biased indices to measure commercial real estate price movement by property type and geography. The index fills a gap for consistent and timely information on fundamental economic issues facing the CRE industry, including the important question of whether prices and values are climbing or falling on a month-to-month basis.
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