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Key CoStar Composite CRE Price Index Flirting With Prerecession High

CCRSI: Led By Industrial and Retail Properties, Commercial Property Prices Continued Steady March in Second Quarter
August 14, 2014
CoStar’s value-weighted U.S. Composite Index, driven by the impact of larger, core property sales, increased 2.3% in the second quarter of 2014 and was up 9.7% for the 12-month period through June 2014. Although it dipped slightly in June, the index is approaching its prerecession highs in 2007.

The value-weighted index, along with the equal-weighted U.S. Composite Index, which weights each sale equally and therefore is more influenced by the more numerous lower-priced property trades typical of transactions in secondary markets, are the two broadest measures of commercial property pricing within the CoStar Commercial Repeat Sale Indices (CCRSI).

The equal-weighted index is tracking closely with the value-weighted index, advancing by 2.4% in the second quarter and 10% for the 12-month period through June 2014.

Overall sales volume is also up so far this year. The number of repeat-sale pair transactions rose 14.5% in the first half of 2014 from the previous year, roughly on par with the totals reached in the first six months of 2006 and 2007.

Sales volume increased 8.8% in the investment grade segment, weighted toward high-value properties, and a strong 27.2% in the general commercial segment, which reflects smaller, lower-value property deals, both covering the first half of 2014 over the same period a year earlier.

Meanwhile, only 8.7% of all properties are selling at distressed pricing as of second-quarter 2014, the lowest distress sales rate since the fourth quarter of 2008.

More information about CoStar's CRE price indices can be found here.

The investment grade segment of the CCRSI has now advanced 41% from its 2009 trough, while the general commercial segment, which didn't begin its recovery until about two years after the investment grade index began increasing following the recession, has now risen 24.1% from its 2011 low.

Gains Ripple across All CRE Sectors, Regions

While all commercial property types saw pricing gains over the second quarter and 12 months ending in June 2014, improving market fundamentals for industrial and retail property stood out for posted the strongest pricing gains. The U.S. Industrial Index advanced 11.5% while the U.S. Retail Index increased 10.5% over the 12 months ending in June 2014.

Among the four main U.S. regions, the Northeast and West continued to attract the most interest from investors. Strong property sales in core coastal markets as New York, Boston, Los Angeles and San Francisco helped drive price growth in the Northeast and West regions, thanks to their high concentration of top tier markets. Several CCRSI sub-indices in these regions, including the Northeast multifamily, Northeast retail, and West multifamily, surpassed their prerecession peak levels.

With the overall Northeast and West Composite indices have now recovered to within 7% and 17%, respectively, of their prior peaks, investors may be turning to the South and Midwest, where prices remain more than 20% below last-cycle highs.

That said, average sale prices for commercial property vary widely across markets. Prices have already risen above their 2006 and 2007 averages in New York, San Francisco, Houston and Denver. However, some of the largest discounts from 2006 and 2007 office prices are still available for buyers in such markets as Portland, Orange County, CA; Phoenix and the East Bay area near San Francisco.

Multifamily Pricing Still Going Up,Only Slower

With construction levels and new supply increasing and pricing at or above peak levels, multifamily vacancies will increase from cyclical lows, CoStar data shows signs of a deceleration in the apartment market in recent quarters, especially in top markets. The Prime Multifamily Metros Index rose 7.1% in the last 12 months, compared with average gains of 16.6% during the prior two annual periods.

Still, the overall Multifamily Index posted an annual gain of 10.3% ending in June 2014, pushing the index to within 4% of its prerecession peak. The Prime Multifamily Metros Index rose 10.4% in second-quarter 2014, surpassing its previous high in 2007.

As investors scooped up land for multifamily and single-family residential development, the
CCRSI Land Index gained 9.7% in the second quarter from its low in 2012.

Price growth for hotel properties has leveled off over the past couple of years after bouncing back with double-digit gains strongly earlier in the recession. The Hotel Index increased by just 4.6% for the year period and remains 33% below is prior peak, despite the 24.1% gain from its 2009 trough.

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