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CoStar Repeat Sale Analysis: Strong CRE Demand Powers Expanding Commercial Property Price Recovery

'Across the Board Improvement' is Prevailing Theme for CRE Pricing, Sales Volume, Fundamentals in May
July 17, 2013
Pricing of commercial real estate strengthened across the board, with pricing gains accelerating in May following a seasonal soft patch in the early months of 2013, reflecting solid market fundamentals, broadening investment activity and healthy demand for virtually all types of commercial properties, according to the latest CoStar Commercial Repeat Sale Indices (CCRSI) release.

The value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index -- the two broadest measures of aggregate pricing for commercial properties within the CCRSI -- increased by 0.7% and 2%, respectively, in May, noted CCRSI index author, Dr. Ruijue Peng of CoStar's Property and Portfolio Research.

The value-weighted index, which is heavily influenced by larger transactions and typically tracks with high quality core real estate prices, has now increased by 41% from its most recent trough in 2010. The equal-weighted index, which is influenced by smaller, more numerous opportunistic transactions, has improved by 10% from its bottom in 2011.

The Investment Grade index measuring repeat sales of higher- and middle-quality assets reached its highest level in more than four years in May. Within the equal-weighted U.S. Composite Index, the investment grade segment shook off the seasonal slump of the previous months and jumped by 2.6%.

Upper-middle tier properties have now recovered by 24.6% since prices for investment-grade property reached their trough in October 2009.

A significant trend in recent months has been the growing investor demand for smaller and lower-quality commercial property assets. Prices in this General Commercial segment are now rising in tandem with those in investment grade category.

Pricing of general commercial assets advanced 1.7% in May from the previous month and 8.2% from its recent low point in the first quarter of 2011 as activity by yield-seeking investors has increasingly extended into secondary markets and property types.

Continuing strong second-quarter absorption in both the investment grade and general commercial categories is supporting the pricing gains. Another function of improving fundamentals and shored-up pricing has been the overall decline in distressed sales. The percentage of commercial property selling at distressed prices fell to an average of 14.1% in April and May -- the lowest two-month average on record since 2008.

The decline in distressed trades continues to support higher and more consistent pricing and improved market liquidity, raising the confidence levels of buyers and sellers to make deals.

The latest release of the CCRSI -- the CRE industry's broadest measure of repeat sales activity -- is based on 1,220 repeat sales in May 2013, and an aggregate of more than 100,000 repeat sales since 1996.

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