CCRSI RELEASE – AUGUST 2013
(With data through June 2013)
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This month's CoStar Commercial Repeat Sale Indices (CCRSI) provide the market's first look at June 2013 commercial real estate pricing. Based on 1,189 repeat sales in June 2013 and more than 125,000 repeat sales since 1996, the CCRSI offers the broadest measure of commercial real estate repeat sales activity.
June 2013 CCRSI National Results Highlights
- COMMERCIAL REAL ESTATE PRICES SURGE IN SECOND QUARTER 2013: On the strength of improving market fundamentals, 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 — continued their upward trend in June. The value-weighted index, which is influenced by larger transactions and generally tracks with high quality core real estate properties, gained 5.9% in the second quarter, its best quarterly showing since 2011. Meanwhile, the equal-weighted index, which is comprised of smaller, more numerous transactions representative of the lower end of the market, jumped by an impressive 9.1% in the second quarter, its strongest quarterly gain on record.
- GENERAL COMMERCIAL SEGMENT GROWTH ACCELERATES IN JUNE: Within the equal-weighted U.S. Composite Index, the Investment Grade segment, which broadly encompasses upper-middle tier properties, continued moving steadily upwards, increasing 7.9% above last quarter. Pricing in the General Commercial segment has taken longer to recover, but has recently gained momentum as investment activity continued to extend into secondary markets and property types. Pricing in the General Commercial segment advanced a stellar 9.2% from the previous quarter and increased 11.7% over the last 12-month period.
- RETAIL TURNS IN STRONGEST PERFORMANCE OF MAJOR PROPERTY TYPES: Stronger consumer spending and a near dearth in new construction helped to bolster pricing gains for retail properties as reflected in the 16% gain in the CCRSI Retail Index over the past 12-month period ending in the second quarter, the strongest performance of the four major property types. Meanwhile, pricing in the Office Index advanced by 11.4%, while the Multifamily Index gained a more modest 11.1% year over year. Among CCRSI’s regional indices, the Midwest regional index recorded the largest regional gain of 16.5% for the previous 12-month period ending in the second quarter, aided by outsized growth in multifamily and retail pricing levels, while the Northeast regional index continued to track the largest cumulative pricing gains since the recovery began.
- DISTRESS SALES CONTINUE TO ABATE: The percentage of commercial property selling at distressed prices dropped to just 13.6% in June 2013, down from nearly 24% one year earlier, the lowest level of distress recorded since the end of 2008. The long-term average for distress trading is less than 1% of total volume, so the recovery still has a ways to go, but the recent declines have helped to boost liquidity and pricing by giving lenders more confidence to do deals.
Quarterly CCRSI Property Type Results
- The leap in commercial real estate pricing in the second quarter was seen across all four major property types. Double-digit annual gains in nearly every property sector demonstrate the depth of the recovery in commercial real estate prices. Pricing in the overall market has increased more rapidly than in the primary markets for all the major property sectors save industrial, suggesting that investors are either being priced out of primary markets or have more appetite for risk as market fundamentals improve.
- The multifamily sector, which has led the recovery in commercial real estate pricing, continued to post strong results. Overall pricing at the end of the second quarter of 2013 was just 13.4% shy of the previous peak reached in 2007. By comparison, pricing in the other major property types is still more than 20% below previous peak levels. While the multifamily sector’s outperformance has been attributable to relatively stronger fundamentals, it has also been a function of plentiful debt financing, led by the government-sponsored enterprises (GSEs), following the downturn. However, there are signs of a deceleration in multifamily fundamentals, mainly as a result of growing new supply, especially in the primary markets where vacancies are at, or near, prerecession lows and pricing has already surpassed its prior peak level. The CCRSI Multifamily Prime Metros Index notched gains of 9.9% over the last year, which was lower than the 11.1% gain for the broader multifamily index.
- Reflecting the continued decrease in vacancy rates across most markets, the CCRSI Retail Index posted the most impressive pricing gains during the second quarter of 2013 of 10.2%. Pricing in the Retail Index is now up 16% over the previous 12-month period, the first double-digit annual price increase in the Retail Index since its recovery began in 2011. The overall retail market outperformed the Prime Retail Metros Index over the past year indicating that investors appear to be branching out beyond core assets in the primary markets and malls, as has been the case in previous quarters. The retail sector’s recent pricing rebound is encouraging because it suggests that the housing recovery may finally be spilling over to the broader economy.
- Pricing in the Office Index advanced by 11.4% for the previous 12-months ending in the second quarter, the second strongest annual performance among the major property segments behind the retail sector. Steady demand for office space during this time, coupled with historically low levels of new construction, has led to the sturdy pricing gains. Investors also appear to be looking beyond the core technology and energy-driven markets for deals as indicated by the slower growth in the Prime Office Metros Index over the last year. The gap in pricing between secondary and top tier markets is exceptionally wide right now, indicating that secondary markets will likely continue to see a rise in pricing over the near term. A strong demand forecast, further expected vacancy compression, and relatively cheap pricing are drawing investors to markets like Portland, Charlotte and Phoenix, where pricing is rising more rapidly than in the core markets of New York and Washington DC, where pricing has already surpassed prior peak levels.
- While the pricing recovery in the industrial property sector began later than in the other major property types, the CCRSI Industrial Index advanced by a solid 9.5% year-over-year in the second quarter. Big-box distribution facilities located in primary logistics hubs have led industrial the recovery, which is reflected in the stronger 22% gain in the Prime Industrial Metros Index over the last year.
- The CCRSI Land Index notched modest price gains over the past four quarters on the strength of continued demand for multifamily development sites and the recovering single-family market. The Land Index gained 1.8% in the second quarter of 2013 accumulating 5.1% price gains over the previous 12-month period.
- The CCRSI Hospitality Index also made promising gains over the last year increasing by 6.1% from the same quarter of the last year. Hotel demand closely correlates with macro economy. With slow but steady economic growth, average room rates are on the rise in most markets. As a result, hotels are becoming a more desirable asset class among investors.
Quarterly CCRSI Regional Results
- All four major regional indices in the CCRSI posted positive quarterly and year-over-year pricing gains. The Northeast Composite Index, which has been bolstered by exceptional pricing growth in a handful of prime multifamily and office markets, remained at the forefront of the recovery. Accordingly, the Northeast Index has climbed to within 7% of its prior peak level in 2007, while pricing in the other regions remains nearly a third below their respective previous high water marks. Among specific property types, the Northeast Multifamily Index has made an early and impressive recovery, already surpassing its prior peak pricing. However, as supply levels begin to mount in many markets investors are turning their attention to other property types in the region. The Northeast Office Index advance by 24.8% over the last year, driven by strong pricing gains in the core markets of New York and Boston, and also among secondary markets such as Pittsburgh.
- Pricing is finally gaining some traction in the Midwest. This region has been the laggard in the recovery, with pricing finally bottoming out in the second quarter of last year, at least a year behind the other regions. Since then, a solid recovery in the multifamily and retail segments has helped the overall Midwest regional index to advance by 16.5% over the last year. Thanks to higher yields and continued investor preference for multifamily assets, the Midwest Multifamily Index advanced by an impressive 34% over the last year, led by gains in solidly performing markets such as Chicago, Minneapolis, Cincinnati and Columbus.
- As was the case in the Midwest, the multifamily and retail sectors are driving recent pricing gains in the South Regional Composite Index. Markets that had not seen the first wave of investment capital, including Tampa, Orlando and South Florida, have seen stronger pricing gains over the last year, helping the overall South Composite Index to advance by 14.2%.
- Pricing in the West region advanced just 3.9% year-over-year compared with a 9% gain in the previous 12-month period. The West Multifamily index led overall pricing gains over the last few years as investors flocked to supply constrained core markets like San Francisco, San Jose and Los Angeles, aggressively bidding up prices. However, as capital is now moving to secondary markets and property types in search of higher yields, pricing in the West Multifamily Index has flattened over the last year, dragging down the total for the region. The West Retail and Office indices advanced by a stronger 6% during the same period.
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 primary provider of websites for 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 million registered members. CoStar operates websites that have over 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.