Feb 11, 2015
Broad Gains Registered Across Property Types and Regions as CRE Price Growth Rose in Tandem with Improving Fundamentals in 2014
CCRSI RELEASE – FEBRUARY 2015
(With data through December 2014)
This month's CoStar Commercial Repeat Sale Indices (CCRSI) provides the market's first look at December 2014 commercial real estate pricing. Based on 1,672 repeat sales in December 2014 and more than 130,000 repeat sales since 1996, the CCRSI offers the broadest measure of commercial real estate repeat sales activity.
CCRSI National Results Highlights
- GROWTH IN CRE DEMAND REFLECTED THE STRENGTH OF THE U.S. ECONOMY IN THE FOURTH QUARTER OF 2014, CLOSING OUT THE YEAR ON A HIGH NOTE. Commercial real estate vacancies remained near cyclical lows and rent growth posted healthy gains across property sectors. Reflecting a greater sense of optimism, the pace of new construction is also ratcheting up across market segments, aside from retail, where new supply remains exceptionally low.
- COMPOSITE PRICE INDICES GAIN IN 2014. Investor interest in commercial real estate has risen in tandem with occupancies, driving up pricing in the value-weighted U.S. composite index by 11% in 2014 to 5.7% above the previous peak in 2007. While investor demand for core assets is still high, yield-seeking investors are increasingly moving to secondary markets in quest of better returns. The equal-weighted U.S. composite index—more heavily influenced by smaller transactions and those in secondary markets—increased 13.3% in 2014. However, the equal-weighted U.S. composite index is still 14% below its prior peak, suggesting more room for price appreciation as the cycle matures.
- PRICE GROWTH CONTINUES ACROSS ALL PROPERTY TYPES AND REGIONS. The Multifamily Index had already reached its prerecession peak earlier in 2014 and, after moving up 11.7% in 2014, is now 3.5% above its 2007 high. The other major property type indices also saw strong growth in 2014, although they are all still more than 10% below previous peak levels, as their recovery continues. Pricing grew 13.9% in the Retail Index, 11.9% in the Industrial Index, and 9.5% in the Office Index in 2014. The South Index led the four major regions in 2014, with price growth of 15.1%.
- CAPITAL MARKETS ARE HIGHLY LIQUID. In a repeat of the seasonal pattern over the last several years, transaction activity spiked in the final month of the year as investors rushed to close deals prior to year-end. Transaction activity in December 2014 helped lift the total number of repeat sales in 2014 to a record high of more than 16,000, an increase of 7.3% from 2013. The low cost of debt continues to support deal volume, while low interest rates have kept spreads over the risk-free rate wide, despite historically low cap rate levels.
- Distress sale transactions continue to wane. The percentage of repeat sales transactions involving distressed assets fell to 9.7% in 2014, its lowest rate since 2008.
Quarterly CCRSI Property Type Results
- PRICING GAINS REMAINED RESILIENT ACROSS ALL PROPERTY SECTORS IN 2014. Pricing in the overall market increased more rapidly than in the Prime Markets Indices over the last year, suggesting that as pricing in the top-tier market segment has matured, investors have an increased appetite for risk and are moving beyond the prime markets as fundamentals improve.
- IMPROVING FUNDAMENTALS SUPPORT PRICE GROWTH OF OFFICE INDICES. Pricing in the Office Index increased 9.5% in 2014 and the Prime Office Metros Index advanced by a similar 9.2% rate over the same period as investor interest continued across both core and non-primary markets. Overall office market fundamentals improved significantly in 2014 as office vacancy decreased to 11.3%, from 11.9% in 2013. Despite a moderate pickup in development, net absorption grew even more strongly, up 40% from 2013 levels, suggesting diminishing headwinds from both shadow supply from the last recession and the trend among employers to reduce office space per employee.
- MULTIFAMILY INDEX EXCEEDS PREVIOUS PEAK. The U.S. Multifamily Index reached its prerecession peak in the second half of 2014, ending at 3.5% above its 2007 high. Multifamily pricing continued to expand, growing 11.7% in 2014. The Multifamily Index was the first property segment to begin its recovery, driven by a greater availability of debt financing and investor demand for well-leased assets in core coastal markets. However, most apartment markets are now in the expansionary phase of the cycle, where construction will begin to exert pressure on occupancies and rent growth.
- RETAIL INDEX POSTS LARGEST GAINS FOR THE YEAR. The overall Retail Index posted a 13.9% increase in 2014, the most impressive gain among the four major property types, as pricing ramped up in response to improving market fundamentals. Pricing gains aggregated in the core coastal markets over the last year, and the Prime Retail Metros Index is now within 1.9% of its prior peak. Accordingly, growth in this top-tier segment moderated to 7.4% in 2014. With development largely quiet, retail demand outpaced supply by a two-to-one margin in 2014. This dropped vacancies 20 basis points to 6.3% in the fourth quarter of 2014, the lowest rate in more than six years, while annual rent growth remained steady at nearly 3%.
- INDUSTRIAL PROPERTY SEES PRICE JUMP. The Industrial Index advanced by a solid 11.9% in 2014, while the Primary Markets Index advanced by 6.1% during the same time period. Industrial vacancy fell to 6.8% in 2014, 80 basis points below the 2007 cyclical low of 7.6%, and construction added only 106 million square feet over the past year, well below the 159 million square feet of net absorption. Because of the segment’s low vacancy level and relative lack of supply, industrial rent growth, usually unremarkable, remained the strongest of the four main property types throughout 2014, posting a 4.3% increase for the year.
- HOTEL PRICE INDEX BOUNCES BACK IN 2014. The Hospitality Index surged upward by 17.7% in 2014 after relatively flat growth of just 0.6% in 2013. National hotel occupancies have reached their highest level since the mid-1990s, fueling room rate and RevPAR growth as well as investor demand.
- DEMAND FOR DEVELOPMENT SITES DRIVES LAND INDEX. The Land Index gained 19.9% in 2014, driven by increased demand for development sites across all property sectors. Despite strong gains over the last year, the Land Index remains 28.9% below last cycle’s peak after reaching its most recent trough in 2012.
Quarterly CCRSI Regional Results
- NORTHEAST COMPOSITE INDEX LED RECOVERY AMONG REGIONS. Thanks to its strong concentration of top-tier markets that were a magnet for investment early in the cycle, pricing in in the Northeast Composite Index rebounded in 2014 to within 1% of the prior peak reached in 2007. This outperformance can be largely attributed to the strong rebound in the Northeast Multifamily and Retail Indices, which soared past their prior peak pricing levels in 2014 by 25.2% and 8.4%, respectively. As the cycle has matured and prices have risen rapidly across the primary Northeast markets, the region is no longer outstripping price gains in the rest of the country. In 2014, growth in the Northeast regional index of 10.5% was the slowest of the four major regions.
- WEST REGION WELL ON THE WAY TO RECOVERY. The West Composite Index recovered to within 12.1% of its previous peak reached in 2007, the second-strongest price recovery after the Northeast region. In 2014, the West’s multifamily and office segments posted the strongest price gains, of 15.6% and 13.7%, respectively. Stellar demographic trends and employment growth in tech-driven markets, including Seattle, San Francisco and San Jose, have driven recent exceptional price growth in this index.
- FAST-GROWING MARKETS BOOST SOUTH REGION. The South Composite Index increased by 15.1% in 2014, driven by strong growth across all property sectors. Price growth has rebounded in fast-growing markets like those in Texas and North Carolina that have benefited from exceptionally strong demand growth, falling vacancies and solid rent gains. The South Multifamily Index posted the strongest annual growth in the composite index, of 14.6% in 2014.
- MIDWEST BENEFITTING FROM EXPANDING INVESTOR INTEREST. The Midwest has lagged behind the other regions in the recovery, with most property type indices here bottoming out in 2012, nearly two years later than those in the Northeast or West regions. Demand growth is generally more subdued in this region, but the Midwest does offer stability and appreciably higher yields. As capital has moved to secondary and tertiary markets over the last year in search of higher yields, Midwest markets have benefited, with a surge in investment activity and price growth. In 2014, the Midwest Composite Index expanded by 12.8% annually, the second-strongest growth after the South region. However, the Midwest Index has the most ground to make up in the recovery, with current pricing down 23% from its prior peak.
About the CoStar Commercial Repeat-Sale Indices
The CoStar Commercial Repeat-Sale Indices (CCRSI) is the most comprehensive and accurate measure 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.
Mark A. Klionsky, Senior Vice President-Marketing (firstname.lastname@example.org).
For more information about the CCRSI Indices, including the full accompanying data set and research methodology, legal notices and disclaimer, please visit http://www.costargroup.com/costar-news/ccrsi.
About CoStar Group, Inc.
CoStar Group, Inc. (NASDAQ: CSGP) is the leading provider of commercial real estate information, analytics and online marketplaces. 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 9 million registered members. Apartments.com is a premier online apartment resource for renters that matches apartment seekers with great apartment homes and provides property managers and owners a proven platform for marketing their properties. CoStar operates websites that have approximately 17.5 million unique monthly visitors in aggregate during third quarter of 2014. Headquartered in Washington, DC, CoStar maintains offices throughout the U.S., in Europe and in Toronto, Canada with a staff of over 2,300 worldwide, including the industry's largest professional research organization. For more information, visit www.costargroup.com.
This news release includes "forward-looking statements" including, without limitation, statements regarding CoStar's expectations, beliefs, intentions or strategies regarding the future. These statements are based upon current beliefs and are subject to many risks and uncertainties that could cause actual results to differ materially from these statements. The following factors, among others, could cause or contribute to such differences: the risk that the trends represented or implied by the indices, including increased construction in multifamily markets, will not continue or produce the results suggested by such trends, such as increased pressure on occupancies and rent growth; and the risk that investor demand and commercial real estate pricing levels will not continue at the levels or with the trends indicated in this release. More information about potential factors that could cause actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to, those stated in CoStar's filings from time to time with the Securities and Exchange Commission, including in CoStar's Annual Report on Form 10-K for the year ended December 31, 2013, and Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, each of which is filed with the SEC, including in the "Risk Factors" section of those filings, as well as the company's other filings with the SEC available at the SEC's website (www.sec.gov). All forward-looking statements are based on information available to CoStar on the date hereof, and CoStar assumes no obligation to update such statements, whether as a result of new information, future events or otherwise.