CoStar Repeat Sale Index Confirms Broad Recovery in Market Fundamentals Fueling Pricing Gains Across Property Types and Regions
In the latest CoStar Commercial Repeat Sale Indices (CCRSI) analyzing property sales through December 2013, found that the recovery in U.S. commercial real estate markets advanced in 2013 as broad gains in net absorption, rents, sales activity and pricing extended across markets and property types
during the year.
The upbeat performance was driven by relatively steady economic growth and job gains of 2.3 million or 1.7% in 2013. During the year, expanding businesses accounted for the highest aggregate net absorption across all four major commercial property types since the recovery began.
The increased demand for space, coupled with continued low construction levels (except for the multifamily property sector, which saw a notable increase in construction), vacancy rates fell across most markets at year-end 2013 from one year earlier, and the national avaerage vacancy rate reached new cyclical lows in both the apartment and industrial sectors over the last year.
Rents Trending Up as Vacancy Declines
The CCRSI report found that improving market fundamentals is beginning to tilt pricing power in the favor of landlords.
In the apartment sector, rents have increased an average of 14% from the trough of the latest cycle, with more modest rent increases of near 6% in the office and industrial segments since those sectors bottomed out in late 2010/early 2011.
Even the beleaguered retail property sector, which experienced rent losses into 2012, saw a turnaround last year, with retail rents growing a modest 1.9% in 2013.
Investor demand for all commercial property types also remained strong, as overall sales volume increased 16% from 2012.
The two broadest measures of commercial property pricing in the CCRSI, the U.S. value-weighted index and U.S. equal-weighted index, each posted strong gains of 11.2% and 7.6%, respectively, in 2013.
Reflecting the stronger price appreciation of larger properties in core markets, pricing in the value-weighted index has now risen to within 5.5% below the previous peak level set in 2007. Meanwhile, the equal-weighted index, which is more heavily influenced by smaller transactions, is still 25% below the prior peak. According to the CCRSI, this suggests that there is plenty of room left in the recovery for price appreciation in lower-end properties and those located in secondary markets, as the recovery continues and investors expand their focus scross more markets.
Price Growth Extends to Include All Property Types
The Multifamily Index was again the leader of the pack, driven by a higher availability of debt financing and strong investor interest in buying leased apartment properties in established markets such as New York, Washington, DC, Boston and San Francisco. The CCRSI Multifamily Index rose 36% over the last three years, more than doubling the gains in other property types during that timeframe.
Most U.S. apartment markets are now in the expansionary phase of the cycle, in which new construction begins to impact occupancy levels and rent growth. The Multifamily Index increased by 7% in 2013, amid stronger gains of 14.1% in the retail sector and 8.9% in the office sector, while pricing in the industrial segment gained 5.9% for the year.
December Transaction Activity Caps Busy Property Sales Year
Continuing the seasonal sales pattern seen over the last several years, commercial real estate transaction activity spiked in the final month of the year as investors rushed to close deals prior to year-end. This year-end increase lifted the total number of repeat sales recorded in 2013 to a record high of nearly 15,000, an increase of 11.2% from 2012's total.
Both the investment grade and general commercial segments of the Index were heavily traded as improving market fundamentals and higher yields available in commercial property relative to other asset classes continued to fuel strong investor interest.
However, the CCRSI also noted the spread between cap rates in core markets and the risk-free rate has narrowed substantially over the last year. This, along with an expected rise in interest rates over the near term, suggests that investors will continue to look for yield in secondary markets and property types, according to the report.
Editor's Note: More detailed analysis of property pricing trends, including by major property type and region, is available in the complete CCRSI report available here.