CCRSI RELEASE – NOVEMBER 2012
(With data through SEPTEMBER 2012)
Print Release (PDF)
This month's CoStar Commercial Repeat Sale Indices (CCRSI) provide the market's first look at September 2012 commercial real estate pricing. Based on 845 repeat sales in September 2012 and more than 100,000 repeat sales since 1996, the CCRSI offers the broadest measure of commercial real estate repeat sales activity.
November 2012 CCRSI National Results Highlights
- COMMERCIAL REAL ESTATE PRICING CLOSES 3rd QUARTER WITH STRONG GAINS: The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the U.S. Value-Weighted Composite Index and the U.S. Equal-Weighted Composite Index—each posted significant gains in September 2012, increasing by 9.7% and 8.2%, respectively, on a year-over-year basis. The two components of the equal-weighted U.S. Composite Index (the Investment Grade and General Commercial indices) both advanced in September, signifying a broad-based recovery in commercial property pricing.
- INVESTMENT GRADE INDEX RIDES SEASONAL SURGE: September 2012 prices are up 15.4% from one year earlier in the U.S. Investment Grade Index, and property pricing in this category is approaching levels not seen since early 2009. While the increase reflects the larger recovery in property pricing, it also is likely part of a seasonal pricing pattern observed over the last several years in which investment-grade transaction activity tends to spike during the last few months of the year. In past years, the corresponding pricing gains in the CCRSI Investment Grade index declined in the first quarter as deal volume slowed, a pattern expected to repeat itself in 2013.
- GENERAL COMMERCIAL INDEX PRICING MOMENTUM CONTINUES: The Equal-Weighted General Commercial Composite Index, which is dominated by smaller, less expensive properties, increased by 4.3% in the 3rd quarter 2012, the largest quarterly gain recorded since the start of the recession. The General Commercial Index has recovered by 8.2% since its trough in March 2011.
- DISTRESS LEVELS DECLINING: Only 18.1% of observed trades in September 2012 were distressed, a level notably lower than the 28.8% average over the past three years. This reduction in distressed deal volume should lead to higher, more consistent pricing, and may also improve liquidity by giving lenders more confidence to finance deals.
Quarterly CCRSI Property Type Results
Multifamily pricing continued to improve in the third quarter of 2012. This property sector has been leading the pricing recovery among all major commercial property types in terms of timing and magnitude. The Multifamily Index advanced by a cumulative 31.9% from the trough in December 2009, through the third quarter of 2012, putting this sector just 17.4% below its peak pricing level reached in 2007.
The Office Index was up by 6.5% over year-ago levels as office-using employment growth outpaced overall employment growth during the past year, attracting a return of capital and a subsequent rise in pricing. Low capitalization rates in the multifamily sector have pushed investors in search of higher yields into alternative property types, which has contributed to the acceleration in price index growth since the start of 2012 in the office and industrial markets.
The Industrial Index recorded its highest pricing gain since the beginning of 2012. The second consecutive quarter of pricing gains may indicate that the recovery among industrial markets has spread beyond big-box distribution facilities in primary logistics hubs.
Pricing gains in the retail property sector have been lower since the start of the year, although they have demonstrated consistency over the past four quarters. As of September 2012, the Retail Index has advanced by 6.3% since the beginning of the year, although pricing remains nearly a third below the peak of the previous cycle.
The Land Index is finally beginning to pick up thanks to a strong multifamily and stabilizing single-family market. The Land Index gained 6.3% in the third quarter of 2012, but is still 42% below its peak in December 2007.
The Hospitality Index also made promising gains, increasing by a cumulative 16.3% since the beginning of 2012. This sector was slow to recover after suffering the steepest cumulative price losses among all the property types. However, with average room rates on the rise in most markets, hotels are becoming a more desirable asset class among investors.
Quarterly CCRSI Regional Results
Among the CCRSI’s four major U.S. regional indices, the South Composite Index turned in the strongest quarterly increase with a 9.5% pricing gain in the third quarter of 2012, based primarily on exceptional increases in the multifamily sector, which has been sustained by population growth and favorable demographics. The industrial sector also helped boost the South Composite Index, reflecting an increase in manufacturing within the region. The region advanced by a cumulative 12.3% since its trough in June 2011.
The Midwest Composite Index was the second best performing region in the third quarter, improving by 4.9%. While pricing in the Midwest’s multifamily sector continued to erode, pricing in the region was buoyed by the promising sales performance of the industrial and office sectors for the past several quarters.
The West Composite Index continued its steady pace of recovery, benefitting from the continued strong performance of multifamily sales. September 2012 pricing in this region is now 10.2% above year-ago levels.
The Northeast has led the recovery for the past two years, thanks to its above-average concentration of prime markets. Commercial property pricing in this region has advanced by a cumulative 11.3% after bottoming in 2010, putting this region closest to its peak level. However, as the recovery has strengthened and higher initial yields have spread from core coastal markets to second-tier metros, the region’s pace of price improvement has slowed as well. In fact, since the beginning of 2012, the Northeast Composite Index has remained flat, and posted a slim 0.8% gain in the third quarter of 2012.
Quarterly CCRSI Prime Markets Results
Pricing in the U.S. Multifamily market increased 11.6% through the first three quarters of 2012. During the same period, the Prime Multifamily Metros Index has fallen by 4.7%, suggesting that multifamily sales in second-tier markets (and low-end, smaller units) are contributing the bulk of recent pricing gains.
Meanwhile, office price growth has largely centered on the high end of the market and in core metro areas. The Prime Office Index has advanced 36.1% from its nadir in late 2009, while the broader U.S. Office Market Index has fallen 2.7% over the same period.
With a 10.6% gain, the Prime Industrial Markets Index posted the highest pricing gains during the third quarter of 2012 reflecting the strong demand for national distribution hubs. The U.S. Industrial Index advanced 7.7% in the third quarter as well, suggesting pricing bifurcation by asset class in this sector may be weakening.
Investor preference remains focused on core retail markets as the Prime Retail index rose 11.3% from the trough through the third quarter of 2012, despite recent fluctuations. Property in the broader retail market has seen a more modest pricing recovery.
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.
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