CCRSI RELEASE – NOVEMBER 2013
Print Release (PDF)
(With data through September 2013)
This month's CoStar Commercial Repeat Sale Indices (CCRSI) provide the market's first look at September 2013 commercial real estate pricing. Based on 1,187 repeat sales in September 2013 and more than 125,000 repeat sales since 1996, the CCRSI offers the broadest measure of commercial real estate repeat sales activity.
September 2013 CCRSI National Results Highlights
- CRE PRICES POST MODEST QUARTERLY GAINS DESPITE SEPTEMBER LULL: After posting modest gains throughout the third quarter of 2013, price growth for commercial property was mixed in September, reflecting the uncertainty that existed over economic policy and an uptick in interest rates. 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—saw little movement for the month. The value-weighted index, which is influenced by larger transactions, expanded by 0.3% in September while the equal-weighted index, which reflects more numerous smaller transactions, dipped by 0.6% in September. However, both indices posted modest gains in the third quarter of 2013, and advanced 8.4% on an annual basis.
- PRICE GROWTH ACCELERATING IN SECONDARY REGIONS AND PROPERTY TYPES: With pricing for multifamily assets in the Northeast and West regions approaching peak or near-peak levels, investors have continued to expand their search for yield beyond core gateway markets, leading to stronger price gains in the office, retail and industrial sectors in other regions, including the Midwest region. After bottoming more than a year later than in the other regions, the Midwest Composite Index has advanced by 15.7% from its trough in mid-2012, buoyed by impressive pricing growth in the multifamily and retail sectors.
- CAPITAL FLOWS REMAIN STRONG: The recovery in market fundamentals and firming of property values has fueled transaction activity by giving lenders more confidence to make deals. This in turn has boosted U.S. composite pair volume, which tallied nearly $60 billion year-to-date as of the third quarter of 2013, an increase of 20% from the same period last year. In addition, capital sources, including a restored CMBS market, banks and life insurers are increasing their CRE lending volumes, joining the government-sponsored enterprises (GSEs) that have provided the primary financing support to date.
- DISTRESS SALES CONTINUE TO WANE: The percentage of commercial property selling at distressed prices dropped to 11.6% in September 2013 from more than 24% one year earlier, enabling banks and other lenders to focus on growth opportunities. The multifamily sector recorded the lowest level of distress in the third quarter of 2013 at 9.5%, which is a cumulative 77% decline from peak levels reached in 2010. The share of distress deals in the other property types ranges from 12.1% in the industrial sector to 15.8% in the office sector. On a regional basis, distress levels have largely worked through the system in the Northeast, with just 7.1% of deals selling at distressed prices, while the Midwest has the furthest to recover with over 23% of property still selling at distressed levels.
Quarterly CCRSI Property Type Results
- While pricing advanced moderately across all four major property types in the third quarter of 2013, the strongest gains took place in the Retail Index, which posted the strongest pricing gains from both quarter- and year-ago levels. A broad improvement in retail market fundamentals has translated into pricing gains of 1.8% in the third quarter of 2013 and 12.6% over the last year. Core markets remain attractive for investors, as indicated by the 23.7% rise in the prime retail index over the last year. However, the price increases are spreading across the wider market. All retail subtypes have benefited from vacancy compression over the last several quarters, including previously struggling neighborhood and strip centers. The resurgence in the single-family housing market has also benefited so-called mom-and-pop tenants in these centers, and this should accelerate as housing sales pick up traction across the country.
- Pricing in the multifamily sector is approaching previous peak levels as investors continue to allocate large amounts of capital to apartment investments. The Multifamily Index rose by 7.5% over the last year and is now just 12.6% below the previous peak for this property type reached in 2007. Core markets remain the most competitive as indicated by the rapid growth in the Multifamily Prime Metros Index, which has already surpassed the pre-recession high water mark by 5.6%. While market fundamentals in this sector have made a full recovery, with new supply flowing quickly in many markets, vacancies are not expected to get much tighter. With pricing at or above peak levels, there are signs of a deceleration in pricing in recent quarters. Average quarterly growth of 1.8% in 2013 is nearly half the rate in the previous two years.
- Steady demand for office space, coupled with historically low levels of new construction, is driving pricing gains of 8.7% in the Office Index for the year ending in the third quarter of 2013. Pricing has already surpassed or is near the prior peak in prime office markets such as San Francisco and Boston. Meanwhile, investor interest in non-primary markets has increased. Office transaction volume has doubled in such markets as Philadelphia, Las Vegas and Indianapolis over the last year. An exceptionally wide gap in pricing between secondary and top tier markets (almost double its magnitude in 2005) indicates that secondary markets will likely continue to see a rise in pricing for office property in the near term.
- The Industrial Index advanced by a solid 5.1% for the year ending in the third quarter of 2013. Construction of large, modern logistics buildings in primary markets such as Dallas and Houston remain in favor, which is reflected in the stronger 9.1% gain in the Prime Industrial Metros Index over the last year. However, the recovery is broadening to smaller industrial buildings in secondary markets as well. Local economies benefiting from the ongoing housing recovery, including Charlotte, Nashville, and Phoenix, have posted solid price gains for industrial properties.
- The Hospitality Index continues to make steady gains, increasing by 4.3% from year-ago levels as slow but steady economic growth boosts average room rates and RevPAR (revenue per available room.) Investor preference for high-quality hotel properties in core markets has led to stronger pricing gains in the primary metros.
Quarterly CCRSI Property Type Results
- Of the four CCRSI regional indices, the West Composite Index turned in the strongest performance in the third quarter of 2013 advancing by 3.2%. The West Office, Industrial, and Retail Indices each posted double-digit pricing gains over the last year, while the West Multifamily Index lost some momentum during that time. A strong and early recovery of multifamily assets and soaring pricing in core markets including Los Angeles and San Francisco have limited recent gains in the West Multifamily Index to 0.6% for the year ending in the third quarter of 2013.
- Pricing in the Northeast Composite Index has recovered to within 10% of its prior peak level reached in 2007, thanks in large part to impressive price growth in the region’s multifamily properties. By contrast, pricing in the other three property type indices remains nearly a third below their previous peaks. The Northeast Multifamily Index has already surpassed its prior peak pricing reached in 2007 by 11%. However, as previously mentioned, supply levels have begun to mount in many Northeast markets and yields continue to compress, causing the region’s pace of price improvement to slow as well. Since the beginning of 2013, the Northeast Composite Index has remained flat, and posted a slim 0.4% gain in the third quarter of 2013.
- Overall price growth in the South region was flat in the third quarter of 2013, but strong demographics and robust population have shored up performance in the retail and multifamily sectors over the last few quarters. The movement of capital to secondary markets such as Tampa, Orlando, and South Florida, has supported gains of 9.5% in the South Retail Index and 4.9% in the South Multifamily Index for the year ending in the third quarter of 2013.
- Pricing in the Midwest region has begun to stabilize after bottoming out in 2012, more than a year later than in the other regions. The Midwest Composite Index was the second-best performing region in the third quarter of 2013, improving by 1.7%, contributing to a 15.7% gain from the most recent trough in the second quarter of 2012. While pricing in the Midwest’s industrial sector continued to erode over the last several quarters, the region was lifted by a solid recovery in the multifamily and retail segments. Thanks to higher yields and continued investor preference for multifamily assets, the Midwest Multifamily Index advanced by 1.8% in the third quarter of this year and 23.5% over the last year.
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 the leading provider of commercial real estate 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 7.7 million registered members. CoStar operates websites that have approximately 9 million unique monthly visitors in aggregate. Headquartered in Washington, DC, CoStar maintains offices throughout the U.S. and in Europe with a staff of approximately 2,000 worldwide, including the industry's largest professional research organization. For more information, visit http://www.costar.com.