CCRSI RELEASE – FEBRUARY 2013
(With data through DECEMBER 2012)
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This month's CoStar Commercial Repeat Sale Indices (CCRSI) provide the market's first look at December 2012 commercial real estate pricing. Based on 1,593 repeat sales in December 2012 and more than 100,000 repeat sales since 1996, the CCRSI offers the broadest measure of commercial real estate repeat sales activity.
December 2012 CCRSI National Results Highlights
- COMMERCIAL REAL ESTATE SALES VOLUME SURGED IN 2012: While rising steadily over the last four years, sales volume reached nearly $64 billion in 2012, a 22% increase from 2011 and the highest annual total since 2004. Activity spiked significantly in December as investors rushed to close deals prior to year-end. In fact, at 1,593, the number of repeat sales in December reached an all-time high since CoStar started tracking the property sales used in the CCRSI. Both the investment grade and general commercial segments were heavily traded as improving market fundamentals and attractive yields relative to other asset classes drove strong investor interest in commercial real estate.
- VALUE-WEIGHTED INDEX PRICING EXPECTED TO MODERATE: Pricing gains in the value-weighted U.S. Composite Index began earlier in the recovery and have been consistently stronger than pricing gains in its equal-weighted counterpart throughout much of the recovery. This reflects the more rapid recovery at the high end of the market for larger, more expensive properties. It also mirrors the trend in the recent recovery of market fundamentals for commercial property, in which demand for Four-Star and Five-Star office buildings, luxury apartments and modern big-box warehouses has outpaced the broader market. However, pricing trends suggest this may be shifting.
- RECOVERY BROADENS TO LOWER END OF THE PRICING MARKET: Despite the recent dominance of larger, more-expensive properties in pricing gains, momentum appears to be shifting to the broader market dominated by smaller, less-expensive properties. This shift is apparent in the value-weighted U.S. Composite Index, which posted a 4.3% year-over-year gain in December 2012, slowing from its double-digit growth rate throughout 2011. At the same time, year-over-year growth in the equal-weighted U.S. Composite Index accelerated in the second half of 2012 and registered 8.1% for the year. Taken together, the two trends signify that investors are moving beyond core properties and driving up pricing at the lower end of the market.
- NEW MULTIFAMILY CONSTRUCTION RESPONDING TO PRICING GAINS: The multifamily property type index advanced by 11.2% in 2012, well ahead of the other major property types. Within the sector, pricing for the ten markets in the prime multifamily index has regained pre-recession peak levels, reflecting the strong investor interest in the segment of the market that has led the overall recovery in commercial real estate pricing. However, construction is now picking up steam in response to the rapid surge in prices. Twice as many multifamily units delivered in 2012 as in 2011 and construction in 2013 is on pace to rise even further. Meanwhile, modest levels of construction in the other property types indicate that further pricing gains are needed before supply ramps up significantly for property types other than multifamily properties and core markets.
- DISTRESS LEVELS DECLINING. Distressed sales made up only 11.5% of observed trades in December 2012, the lowest level witnessed since the end of 2008. This reduction in distressed deal volume has been driving higher, more consistent pricing.
Quarterly CCRSI Property Type Results
- While the single-family housing market’s burgeoning recovery has grabbed the headlines, the multifamily property sector has led the recovery in commercial property pricing in terms of timing and magnitude. The broader Multifamily Index posted double-digit gains over the past year, while pricing in the Prime Multifamily metros has now surpassed its pre-recession peak set in mid-2007. These gains reflect the strong fundamentals of the multifamily market, where vacancies have compressed by 220 basis points since 2009 and rents have also recovered to surpass their pre-recession peak. However, construction has surged in response to these favorable conditions, especially in primary markets that have been at the forefront of the recovery. As the pricing recovery expands beyond multifamily, this sector’s stellar pace of growth is beginning to moderate. The multifamily sector recorded only a 1.4% gain in the fourth quarter, the lowest percentage increase among all major property types, even though annual pricing gains for the multifamily sector topped all others.
- Despite posting uneven gains over the past couple of years, the Office Index advanced at a healthy clip in 2012 as fundamentals in the sector continued to strengthen. Higher pricing in the multifamily sector also pushed capital to alternative property types in search of higher yields. Pricing gains in the office sector have proven to be more robust in the core coastal metros and in tech-centric markets than in the overall market. As such, the Prime Office Index advanced by 14.4% for the year end in December 2012, while the broader property type index expanded at a more modest 4.6% pace over the same period.
- The recovery of industrial property pricing has been dampened as the European recession has reduced U.S. exports. The Industrial Index was the only major property type index to continue to post mild pricing losses into early 2012. Since then, however, pricing in this sector has begun to pick up momentum. The broader property type index advanced 8% from a year ago. Meanwhile, the recovery to date has centered on big-box distribution facilities located in primary logistics hubs, as the Prime Industrial Metros Index was up 20.4% for the year.
- Mirroring the slow but steady improvement seen across most market fundamentals, pricing in the retail sector has demonstrated consistency over the last six quarters. While investors remain cautious, pricing has advanced by 6.8% during the year ended December 2012. The retail prime markets index advanced by a stronger 15.7% over the last year indicating investors may still be hesitant to venture too far out on the risk spectrum at this point in the cycle.
- The CCRSI Land Index showed signs of recovery over the past two quarters due to strong demand for multifamily development sites and the stabilizing single-family market. The Land Index gained 3.6% in the last quarter of 2012 but is still 39.9% below its peak in December 2007.
- The Hospitality Index also made promising gains last year, increasing by a cumulative 22.2% in December 2012 since December 2011. This sector was slow to recover after suffering the steepest cumulative price losses among all the property types during the recent recession. However, with average room rates on the rise in most markets, hotels are becoming a much more desirable asset class among investors.
Quarterly CCRSI Regional Results
- Among CCRSI’s four major U.S. regions, the West Composite Index was the only region with negative quarterly pricing movement. However, despite a 1.1% decline in the fourth quarter of 2012, this region had the strongest recovery on an annual basis, rising 9.0% in 2012. As with the U.S. as a whole, the exceptional pricing gains in the West region were driven by the multi-family sector, which was sustained by strong population growth and favorable demographics.
- The Northeast region has led the pricing recovery in commercial real estate for the past two years, thanks to its above-average concentration of prime markets. However, as the recovery has expanded from core coastal markets to second-tier metros offering investors higher initial yields, the Northeast region’s pace of price improvement has slowed. Over the last year, the Northeast region posted the slowest annual gain of 5.5%.
- CCRSI’s South Composite Index continued its moderate pace of recovery. Strong pricing performance of industrial and multifamily sectors are the primary reason for the recovery of this region, which advanced by 6.7% annually in 2012.
- After a lackluster first and second quarter 2012 performance, the Midwest Composite Index expanded in the last half of the year, primarily resulting from exceptional increases in the office and multifamily pricing in this region. Overall, pricing in the Midwest advanced by a cumulative 6.5% in 2012.
About the CoStar Commercial Repeat-Sale Indices
The CoStar Commercial Repeat-Sale Indices (CCRSI) are the most comprehensive and accurate measures of commercial real estate prices in the United States. In addition to the national Composite Index (presented in both equal-weighted and value-weighted versions), national Investment Grade Index and national General Commercial Index, which we report monthly, we report quarterly on 30 sub-indices in the CoStar index family. The sub-indices include breakdowns by property sector (office, industrial, retail, multifamily, hospitality and land), by region of the country (Northeast, South, Midwest, West), by transaction size and quality (general commercial, investment grade), and by market size (composite index of the prime market areas in the country).
The CoStar indices are constructed using a repeat sales methodology, widely considered the most accurate measure of price changes for real estate. This methodology measures the movement in the prices of commercial properties by collecting data on actual transaction prices. When a property is sold more than one time, a sales pair is created. The prices from the first and second sales are then used to calculate price movement for the property. The aggregated price changes from all of the sales pairs are used to create a price index.
For more information about CCRSI Indices, including our legal notices and disclaimer, please visit http://www.costar.com/ccrsi.
About CoStar Group, Inc.
CoStar Group (Nasdaq:CSGP) is commercial real estate's leading provider of information, analytics and marketing services. Founded in 1987, CoStar conducts expansive, ongoing research to produce and maintain the largest and most comprehensive database of commercial real estate information. Our suite of online services enables clients to analyze, interpret and gain unmatched insight on commercial property values, market conditions and current availabilities. Through LoopNet, the Company operates the most heavily trafficked commercial real estate marketplace online with more than 6.5 million registered members and 3.5 million unique monthly visitors. Headquartered in Washington, DC, CoStar maintains offices throughout the U.S. and in Europe, including the industry's largest professional research organization. For more information, visit http://www.costar.com.