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Price Momentum Continues to Build for Commercial Real Estate

Latest CoStar Commercial Repeat Sale Analysis Finds Property Pricing Benefitting from Broad Recovery in Market Fundamentals
April 16, 2014
This month's CoStar Commercial Repeat Sale Indices (CCRSI) provides more evidence of two broad trends in the commercial real estate investment market: the continued strong demand for top quality institutional-grade assets by big investors, and widening investor demand for mid- and lower-quality commercial property as the pricing recovery extended to smaller markets and secondary property types.

Based on an analysis of 1,028 repeat sales in February 2014 and more than 125,000 repeat sales since 1996, the CCRSI found commercial real estate prices registered broad gains during that month. The two broadest measures of aggregate pricing for commercial properties within the CCRSI-the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index-gained 1.1% and 1.7%, both reached double-digit growth over the previous 12-month period.

The value-weighted U.S. Composite Index, which is more heavily influenced by high-value property sales that have seen prices skyrocket over the last two years, has risen to levels not seen since early 2008, reaching to within 5% of its pre-recession peak.

Meanwhile, the equal-weighted U.S. Composite Index, which is more heavily influenced by the more-numerous lower-value trades, remained 22.3% below its prior peak. However, pricing for lower-end properties appears to be gaining momentum. The index made its strongest annual gain in February 2014 since the current recovery began, advancing by 15.7% over the last 12 months as investors continued to expand their buying activity in non-prime markets.

The momentum shift to lower quality and smaller properties also appeared in the recent growth of the General Commercial segment, which grew by a similar 15.7% over the previous year, while its counterpart, the Investment Grade Index, advanced by an equally strong 15% over the same period.

In reporting on commercial property pricing trends, CoStar's CCRSI made note of the continued positive net absorption across the three major property types - office, retail and industrial - which totaled 378.2 million square feet, a 15.3% increase from the prior 12-month period. Consistent with recent pricing trends, net absorption within the General Commercial segment rose 48% during the same period, compared with a 5% annual gain for the same period in the Investment Grade segment.

In keeping with the pattern set in previous years, the number of properties trading hands over the first three months of year is typically one-third lower than year-end sale volume. However, despite the slowdown, the CCRSI noted that transaction activity through February 2014 suggests that the year as a whole will be very active for commercial real estate investment. Having racked up a composite pair volume of nearly $10 billion through the first two months of the year, 2014 has already exceeded first quarter 2013 totals.

The full CoStar Commercial Repeat Sale Indices (CCRSI) report, including an accompanying data set analyzing commercial property sales through February 2014, is available here.

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