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OBSERVATION AND THEMES
- The commercial real estate market’s pricing has been a tale of two worlds with the largest metro markets attracting significant institutional capital and forcing prices upward over the first two quarters of 2010, while the broader market has continued to soften.
- This divergence of the two worlds may soon change as we are now witnessing a pause and softening even within the investment or institutional grade primary markets.
- Over the past ten months we have seen the overall CCRSI oscillate from positive to negative and back again, with preliminary July figures very likely to be down for the investment grade property markets. From May to June, the overall CCRSI was down 7.78% with the investment grade property declining by 4.83%, reversing previous positive movement.
- The pause in some of the positive price trends we are now observing corresponds to renewed uncertainty in the US economy, persistent weakness in the housing market, as well as concerns surrounding the European economy. In addition, financial reform has slowed commercial mortgage markets as lenders are now in the process of interpreting capital requirements and "skin-in-the-game" provisions.
- Many of the opportunity funds continue to seek out distressed properties, which are affecting the prices shown here, but the expectations of a tsunami of opportunities have not materialized and overall transaction volumes remain below normal.
- Distressed sales as a percent of transaction volume are highest for hospitality at 35% followed by multifamily at 28%, office at 22%, retail at just under 20% and industrial at about 17%. These volumes appear to be stabilizing and the “extend and pretend” behavior of some lenders is likely to continue for the next several months.
National Composite Monthly Indices
OBSERVATION OF SUB-INDICES
When all commercial real estate transactions are considered, every major property type appeared to soften in terms of prices in the last three months. However, the top-ten largest office markets posted a positive 6.2% price change as did the top-ten industrial markets which rose 2%. Retail prices suffered the most in the second quarter of 2010 with a drop of 12%, in part because the top ten retail markets had -17% loss in prices.
By region, Northeast and West suffered more a pullback than the South and Midwest, although both are coming off much higher peaks than South and Midwest. The only positive price trends out of 16 regional indices provided below were Midwest office at 5.7%, Northwest apartments at 3.5%, West industrial at 1.8% and South apartments at 1.0%.
Commentary on data
The CCRSI July report is based on data through the end of June. In June, 665 sales pairs were recorded, up significantly from May, during which 506 transactions occurred. Overall, there has been an upward trend in pair volume going back to 2009. February 2009 appears to have been the low point in the downturn in terms of pair volume, when 374 transactions were recorded. Since then pair volume has increased overall, and beginning in November 2009, year-over-year changes in pair volume have been positive every single month.
In terms of the mix of pairs that have sold, June saw an increase in the proportion of repeat investment grade properties trading hands. Investment grade sales amounted to 31% of the total number of sales in June, the highest level it has been going back to January 2008. This indicates an increased mix of larger properties changing hands, which had been at decreased levels since the beginning of the recession. Prior to June, 24% of sales pairs in 2010 were considered investment grade. This compares to an average of 33% of sales pairs being investment grade in 2006 and 2007, before the start of the downturn.
Distress is also a factor in the mix of properties being traded. Since 2007, the ratio of distressed sales to overall sales has gone from around 1% to above 23% currently. Hospitality properties are seeing the highest ratio, with 35% of all sales occurring being distressed. Multifamily properties are seeing the next highest level of distress at 28%, followed by office properties at 21%, retail properties at 18%, and industrial properties at 17%.
Number of Repeat Sale Transactions
Distressed Transactions as % of All Transactions
National Property Type Quarterly Indices
U.S. Regional Quarterly Indices
Office Top 10 Metros Quarterly Indices
Industrial Top 10 Metros Quarterly Indices
Retail Top 10 Metros Quarterly Indices
Multifamily Top 10 Metros Quarterly Indices
U.S. West Property Type Quarterly Indices
U.S. South Property Type Quarterly Indices
U.S. Midwest Property Type Quarterly Indices
U.S. Northeast Property Type Quarterly Indices
Vikki Kayne - 301-280-3858 - firstname.lastname@example.org
Dr. Norm Miller - 858-678-4206 - email@example.com
For more information about CCRSI Indices, please visit www.costar.com/ccrsi/.
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