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- General commercial real estate and the broad-based CoStar composite index for all commercial real estate reversed the positive trend reported in last month’s findings and came in at -3.48% and -1.38% respectively for the month of August. This up-and-down pattern has repeated itself for both investment grade and general real estate, with each of them often heading in opposite directions during the same month. Some of this is “noise” but it is also indicative of the market bouncing along a “rocky bottom,” as Dr. Karl Case recently described it for his Case-Shiller residential indices.
- Repeat sales values for investment grade commercial property reversed their negative trend from July and moved positive again with a 3.73% climb in August. We continue to see a significant spread in cap rates and prices from the larger property in prime core markets to the property in second- and third-tier broader markets. Even with tighter financing, there appears to be plenty of institutional and REIT capital oriented to the lower-risk core markets.
- For the past three months, all three indices are negative at -3.92% for the broad general index, -3.24% for investment grade and -3.92% for the composite. For the past 12 months, all three indices are down approximately 10% to 11%.
- Over the past two years, the general real estate index is down 24%, investment grade is down 32% and the composite is down 26%.
- From the peak in February of 2008, the general real estate price index is down 27%, the investment grade down 34% and the composite index down 29%.
- For comparison purposes we note that the Moody’s REAL Commercial Property Price (CPPI) released on Sept
27th for July declined by 3.1% compared to our investment grade index, which declined 5.0%. Most likely we expect the Moody’s CPPI will be positive next month reversing the negative figure just reported.
- One reason for the volatility of these indices discussed here is the proportion of distress sales, which are continuing to climb in absolute levels, although as a percentage of sales they have leveled since June. This volume of distressed sales, while certainly not a tsunami, is still significant especially among lodging and multifamily properties.
- Sales transaction dollar volumes used to calculate the CoStar Commercial Repeat-Sale Indices were just slightly lower for investment grade and higher for general real estate. Overall transaction and dollar volumes are up.
- The most active buyers continue to be REITs, both public and private, followed by developer/owners and individuals as well as investment managers including some hedge funds.
National Composite Monthly Indices
Comparison Table for Current Release
COMMENTARY ON DATA
The CCRSI September report is based on sales data through the end of August. In August, 559 sales pairs were recorded. Typically we receive additional sales data that adds a few percent to the numbers from 2 months ago, and up to 12% more data from one month ago. We revise the figures for the last three months but note that very little revision is necessary for data older than the last month, and even for those from the prior month our revisions are usually modest, never yet changing direction. Figures older than 3 months will not be revised. Dollar volumes for both the investment grade and general real estate indices were up approximately 20% in August compared to July.
Overall, there has been an upward trend in pair volume dating back to 2009. January 2009 appears to have been the low point in the downturn in terms of pair volume, when only 376 transactions were recorded. Since then, pair dollar volume has increased overall and the average deal sizes for both general and investment grade have increased.
In terms of the mix of pairs that have sold, August saw an increase in the proportion of repeat general commercial real estate properties trading hands. Investment grade sales amounted to only 25% of the total number of sales in August compared to 28% in July and 29% in June. In 2009 the average proportion of investment grade transactions of the total was 22.5% and in 2008 it was 26%. This compares to an average of 33% of sales pairs being investment grade in 2006 and 2007, before the start of the downturn.
Distress continues to be a significant factor in the index results. Since 2007, the ratio of distressed sales to overall sales has increased from approximately 1% to approximately 23% currently. Discounts on distressed property sales (REOs and short sales) compared to non-distressed sales are running an average of 40% for multifamily, 20% for office and industrial and 17% for retail property based on 2010 data to date.
Number of Repeat Sale Transactions
Number of Distressed Commercial Real Estate Deals by Quarter
2005 through 2nd Quarter of 2010
Distressed Transactions as % of All Transactions through 2nd Quarter of 2010
National Property Type Quarterly Indices through June of 2010
U.S. Regional Quarterly Indices through June of 2010
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
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