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Commercial Property Pricing, Sales Gains Continue In First Quarter

CoStar Repeat Sale Index: Pricing Momentum Increased Across Property Types and Regions Amid Broad-Based Recovery in Occupany, Absorption, Rents
May 15, 2014
Strengthening fundamentals in all major property types and across U.S. regions bolstered continued gains in commercial real estate pricing and transaction activity in the opening months of 2014, according to the new CoStar Commercial Repeat Sale Indices (CCRSI) report.

Vacancies have fallen to within 100 basis points of pre-recession levels in the office and retail sectors and are now lower than pre-recession levels for industrial property, according to this month's CCRSI report analyzing data through March and first-quarter 2014.

Driven by an uptick in transaction activity in March, first-quarter sales volume was up 33% from a year ago, logging an aggregate sale pair volume of $16 billion for the quarter.

First-quarter 2014's investment activity was 33% higher than the first quarter of 2013, suggesting that capital flows should continue to be strong this year. Moreover, the percentage of deals selling at distressed pricing has also fallen to just 10% of all composite pair trades, down by more than two-thirds from the peak levels of 2011.

Improving fundamentals is reflected in pricing gains in all the major property type indices, with the strongest growth over the last year found in the retail and industrial sectors.

While demand growth has so far been modest compared with the previous cycle, the slower pace of absorption has kept new development in check. That has allowed vacancy rates to continue to shrink in all but the apartment sector, where new supply has now exceeded absorption gains.

General Property Recovery Deepens


The two broadest measures of pricing for commercial properties within the CCRSI both finished the first quarter on a positive note. However, the equal-weighted U.S. Composite index, which represents lower-value properties, saw the greatest momentum in early 2014 --pricing was up 4.2% for the first quarter, and 17.1% year-over-year.

Pricing gains have slowed, meanwhile, in the U.S. value-weighted index, which is more heavily tilted toward larger and higher-value properties. Those higher-end properties have already recovered to within 5% of their prior peak. The value-weighted index rose by a modest 0.5% for the first quarter and 10.1% for the four quarters ending in March 2014.

Within the equal-weighted index for lower-value properties, the General Commercial segment -- primarily encompassing smaller deals typical in secondary and tertiary markets -- made its strongest annual pricing gain since the recovery began. The segment increased by 17.2% over the past 12 months, reflecting growing investor interest in non-primary markets. The Investment Grade sub index within the equal-weighted index rose by 14.9%.

West Is Best; Retail Rebounds


The West Regional Index increased 13.6% in the 12 months ending in March, the strongest annual gain among the four major U.S. regions. Multifamily property pricing has increased to within 4% of the previous peak in the West, while the office, retail and industrial indices all posted double-digit gains.

The West has also been the nation's strongest region for industrial properties. Robust investor demand for core warehouse and light industrial led all the regional property type indices for the 12-month period, logging 17.4% annual growth.

Given the recent run-up in pricing in many top markets over the last couple of years, the CCRSI Prime Markets indices advanced at a slower rate than the broader market for the 12 months ending in March.

Retail, the slowest sector to recover from the recession, is now seeing some love from investors. The Retail Index is up 25% from its trough and 14.9% for the 12 months through first-quarter 2014. Despite it boasting the strongest annual gain among the property types, retail pricing remains at 2005 levels, suggesting there may be further runway of rent and income growth.

The overall U.S retail market outperformed the Prime Retail Metros Index over the last year, indicating that investors are branching out beyond the well-leased malls and infill retail in the best markets into secondary and tertiary locales. Metros with outsized population and economic growth such as Austin, Charlotte and Denver posted above-average pricing gains in the year ending in March 2014.

The industrial property recovery has broadened across the size and quality spectrum. Over the last four quarters, even the smallest industrial buildings of less than 50,000 square feet have benefited from net move-ins, joining the modern big-box logistics warehouse that have led the recovery.

The Industrial Index rose by 11.5% for the year
ending in the first quarter -- driven by a 9.7% gain in the Primary Markets Index -- and has advanced 20.1% from its trough in 2012.

In other sectors through the 12 months ended in March 2014:

--The Multifamily Index continued to post steady growth, advancing by 7.8%, even though pricing in the prime metros index has surpassed its previous peak set in 2007 by 10%. Pricing in the overall multifamily index is now within 8% of its pre-recession peak. With steep competition and pricing for top assets in prime
metros, recent pricing gains likely reflect shifting investor
interest to Class B properties in primary markets and higher-quality properties in secondary and tertiary markets.

--As of the first quarter, the Office Index had increased 15.3% from its market nadir in early 2011. Office prices increased 6.2% in the 12 months ended March 2014 as construction levels remained low and office job growth continued to outpace the broader market.

Pricing has already surpassed prior peak levels in primary markets, including New York and San Francisco. As with other property types, investor interest in non-primary markets has increased, with office sales up nearly 30% from historical average levels in markets such as Austin and Nashville.

--The Hospitality Index declined by 2.3% in the 12 months ended March 2014, reflecting a slowdown in revenue per available room (RevPAR) growth and occupancies following the robust post-recession bounce-back in 2010 and 2011. The hospitality index has recovered 23.2% from its 2009 trough.

--The Land Index also continued its slow recovery as demand for multifamily development sites and a resurgent housing market supported gains of 7.2% through the first quarter above its trough in 2012.

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