CoStar Commercial Repeat-Sale Analysis Shows Increases In 26 Out of 31 Pricing Indices In the Second Quarter
In an analysis of commercial real estate
sales completed through June of this year, investors showed a sharpened appetite for commercial property, with increasing demand pushing prices up in the second quarter, according to the latest release of the CoStar Commercial Repeat Sale Indices (CCRSI).
The majority of CoStar Group's quarterly pricing sub-indices, 26 out of 31, showed increases in the second quarter of 2011 - including a 6.1% increase in the National Composite Index, reversing a 6% decline in the first quarter, according CoStar repeat-sales data through the end of June, shortly before the drawn-out debt ceiling debate and subsequent credit downgrade by Standard & Poor’s threw cold water on the tepid market recovery.
Through June, commercial property values were showing strong improvement. The Investment Grade Index increased 11.9% in the second quarter, mostly offsetting the previous quarter's 12.6% decline, while the index measuring general-grade real estate increased 4.7% in the second quarter, offsetting the previous quarter's 4.4% decline.
On a month over month basis, CoStar’s National All Property Type Composite Index rose 2.2% in June from May, compared to a decline of 1.5% during the same period a year ago. The index remains about 33% below peak levels, however.
The investment grade index rose 3.1% month over month, compared to a 6.8% jump a year ago, while general property rose 1.9%, compared to a 3.3% decline a year earlier.
Office buildings saw the greatest increase in pricing levels among all commercial property types, increasing 17.4% in the second quarter from the first three months of 2011. Office building
pricing in the 10 largest U.S. markets rose 20.1% during the same period, pointing to the faster pace of recovery in core metros versus secondary and tertiary markets.
Industrial and multifamily properties each saw solid gains in prices, rising 10.4% and 9.5%, respectively, from the first quarter. Retail properties, where rents continue to decline, recorded a slight sales price drop of 0.2%.
"Investors have been significantly increasing their direct investments in commercial real estate this year based on the expectation of improving space market fundamentals, and low yields in alternative investments," said Chris Macke, CoStar senior real estate strategist.
Real estate continues to be a calm spot amid the roiling the financial markets.
"While the improvements in fundamentals are now being questioned by some, the recent volatility in the stock markets may cause increased interest in direct real estate investments as a safe haven, given the tangible nature of commercial real estate, and even lower alternative asset yields," Macke said.
Among U.S. regions, the South region edged out the Midwest region as the best-performing area of the country, with a strong 12.6% pricing increase in pricing during the quarter. The Midwest recorded an impressive 12.4% increase while the West, which has lagged in the commercial real estate recovery, saw a respectable 5.4% rise. The Northeast region, where prices rose quickly in New York City earlier in the cycle, saw a 5.3% decline in pricing.
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In the South, apartments rose 32.5% in the quarter, while office and industrial properties increased 16.2% and 15% quarter over quarter, respectively.
Transaction activity increased 24% from 2,176 deals in the first quarter of 2011 to 2,690 in the second quarter, driven by a 33% increase in investment-grade transactions.
While the CCRSI is an equal weighted index, it is worth noting that deal activity on a dollar-volume basis increased 73% from the first quarter of 2011 -- a clear sign that investors are seeking larger transactions.
In June 2011, CoStar recorded 914 sales pairs compared to 896 in the prior month, up sharply from the apparent low point of January 2009 in the most recent downturn, when 385 transactions were recorded.
While overall dollar volume of sales continues to trend significantly upward on a quarter over quarter basis, the average transaction size for investment grade sales pairs fell from $34.35 million in May 2011 to $19.86 million June 2011. The average dollar size of transactions in the general commercial index increased to $1.86 million in June 2011 as compared to $1.72 million May.
Distress sales as a percent of the total sales pairs dropped to 25.9% in June from 28.3% in May for the composite index. For the investment grade index, the percent of distressed sales increased to 34% in June from 32.2% in May.
"Investment grade properties are typically financed by the larger banks, who are finally in a position to dispose of some of their distressed assets," said Macke. "The smaller general commercial real estate is typically financed by smaller banks that aren’t in a position to sell their distressed assets."
By property type, hospitality had the highest percent of distressed sales in June at 37.9%, followed by office at 29.8%, multifamily at 26.3%, retail at 22.4%, and industrial at 18.8%.
By transaction count, general grade sale pairs accounted for 82.6% of the total sales transaction count in June 2011 down from 85.4% in June 2010.
Editor's Note: Join CoStar Senior Real Estate Strategist Chris Macke online on Tues., Aug. 16, 3 p.m. ET, 12n PT for a live discussion of the latest CCRSI findings and emerging data trends. Follow Chris on Twitter at @CoStarMacke