Commercial Property Prices Moderated in August Despite Strong Absorption of Available Space Across More Markets
Even as businesses continue to lease office, industrial and retail space
at a faster clip, prices for U.S. commercial property leveled off in August as investors reacted to signals that the Federal Reserve was considering plans to begin tapering its elevated bond purchasing activity once the economy fully achieves firm footing.
Although long anticipated, the news caused investors to pause and take stock of the overall economic impact from any reduction in the Fed's quantitative easing program, which is expected to result in higher interest rates and increased borrowing costs.
The 'August recess' in pricing growth was apparent in the two broadest measures of aggregate pricing for commercial properties within the latest CoStar Commercial Repeat Sale Indices (CCRSI) released this week
, which analyzes property sales through August. The equal-weighted of the U.S. Composite Index, which reflects the pricing impact of more numerous smaller transactions, edged downward by 1.1% in August, while the value-weighted version of the Composite Index, which is influenced by larger transactions, expanded by 1.6% during the same time period.
While the monthly performance reflected the immediate market reaction to the Fed, pricing for commercial property continued to rebound from post-recession lows on an annual basis, with both segments of the CCRSI Composite Index increasing by nearly 10%.
Commercial property sales volume was also up in August. The number of repeat sale transactions for the month increased 15% from the same period one year ago, while the value of properties in those transactions increased 17%. The percentage of commercial property selling at distressed prices remains near a four-and-a-half year low.
Strong Absorption Continues to Support Broad Recovery
Meanwhile, businesses continued to lease up available space across the three major commercial property types -- office, retail and warehouse. For the first three quarters of 2013, net absorption among these three property types totaled more than 240 million square feet in the U.S., the highest level for the first three quarters of a year since 2008.
Leasing activity first began to strengthen in core CBD office markets, such as New York, San Francisco and Houston, and in large distribution markets such as Dallas and Chicago, which led other markets in absorption within CCRSI's Investment Grade segment and reflected in the faster pricing growth in this index since 2009.
More recently, increased leasing activity has spread into CCRSI's General Commercial segment, indicating a broader and more sustained commercial real estate
recovery. In the office market, for example, nearly 90% of total net absorption over the last year was in suburban submarkets. Pricing in the General Commercial Index rose by 3.7% in the last quarter, compared with growth of 0.1% in the Investment Grade Index.
While the slow down in pring growth for commercial property in August appears to be a blip in investor confidence that eased in September when the Fed said it would delay any tapering of its quantitative easing policies, investors will be watching economic indicators carefully in coming weeks. As CoStar noted in its CCRSI update, further economic uncertainty, largely stemming from the U.S. government shutdown and debt ceiling debate, may lead to further volatility in pricing in the near term.