Aug 19, 2015
Property Prices: Ready, Steady, Go In Second Quarter 2015
Multifamily and Office Property Types, Northeast Region See Strongest Gains
Multifamily and Office Property Types, Northeast Region See Strongest Gains
CCRSI RELEASE – AUGUST 2015
(With data through JUNE 2015)
This month's CoStar Commercial Repeat Sale Indices (CCRSI) provides the market's first look at June 2015 commercial real estate pricing. Based on 1,469 repeat sales in June 2015 and more than 140,000 repeat sales since 1996, the CCRSI offers the broadest measure of commercial real estate repeat sales activity.
CCRSI National Results Highlights
- COMPOSITE PRICE INDICES ROSE STEADILY IN THE SECOND QUARTER OF 2015. The value-weighted U.S. Composite Index, which is influenced by sales of high-quality assets in core markets, and the equal-weighted U.S. Composite Index, which weighs each sale transaction equally and therefore reflects more numerous smaller deals, increased at similar rates of 2.1% and 2.4%, respectively, in the second quarter of 2015. Both indices are up by double digits in the 12-month period ending in June 2015. The value-weighted U.S. Composite Index continues to lead the recovery and is now 13% above its prior peak, while the equal-weighted U.S. Composite Index remains 8% below its previous high-water mark in 2007.
- EQUAL-WEIGHTED INDEX GROWTH LED BY LOWER-TIER PROPERTY SALES. The General Commercial segment, encompassing smaller deals typical of secondary and tertiary markets, advanced by a strong 2.6% in the second quarter of 2015 and 13.5% for the 12 months ending in June 2015, as these smaller, non-prime markets continued to attract property investors. The index has recovered to within 9.2% of its previous peak. The Investment Grade Index, encompassing larger property sales in prime markets, posted solid but more modest growth of 1.7% in the second quarter of 2015 and 11.1% in the 12 months ending in June 2015. Reflecting the earlier start to its price recovery, as of June 2015 that index has moved to within 4% of its prior peak.
- NORTHEAST LED RECOVERY AMONG ALL REGIONS. Strong investor demand in core coastal metros pushed the Northeast Composite Index up 14.9% in the 12 months ending in June 2015, the fastest growth rate among the four CCRSI regional indices. Three of the four property type indices within the Northeast region—multifamily, retail, and industrial—have surpassed prior peak levels as of June 2015.
- MULTIFAMILY AND OFFICE EARNED BIGGEST ANNUAL GAINS AMONG FOUR MAJOR PROPERTY TYPES. Despite strong construction levels, multifamily properties remained much in favor with investors, with pricing up 14.1% in the 12 months ending June 2015. The Office Index also gained momentum, increasing by 11.9% during the same period. The Retail and Industrial Composite Indices advanced more slowly during the 12 months ending in June 2015, but moved to within 5% and 9% of their previous peaks, respectively, in the second quarter of 2015.
- ROBUST TRANSACTION ACTIVITY SUPPORTED PRICE GAINS. Composite pair volume of $58.8 billion in the first half of 2015 was an increase of 43.7% compared with the first half of 2014, suggesting that capital flows into property investment will continue to be strong this year. Also, the share of distressed properties trading declined to 6.6% in the first half of 2015, down from a recessionary peak of nearly 33%.
Quarterly CCRSI Property Type Results
- MULTIFAMILY INDEX CONTINUED TO LEAD THE PACK. The quarterly CCRSI Multifamily Index advanced 2.9% in the second quarter of 2015, contributing to annual gains of 14.1% in the 12-month period ending in June 2015, the strongest annual rate of the four major property type indices. The Multifamily Index regained its pre-recession peak in the second half of 2014, well before any other property type, and as of June 2015 stands 12% above its 2007 high. Driven by continued strong investor interest in top-tier assets in core markets, pricing in the Prime Multifamily Metros Index led all repeat sale indices in the recovery and as of June 2015 was 32.4% above its previous peak in 2007. However, steep competition for core assets slowed recent gains in the Prime Multifamily Metros Index to 11.1% for the 12-month period ending in June 2015, versus 16% in the year prior.
- OFFICE PRICING GAINED MOMENTUM. While still more than 13% below its prior peak, the quarterly U.S. Office Index increased 2.6% in the second quarter of 2015 and 11.9% in the 12-month period ending in June 2015, the second-fastest growth rate in the major property type indices. Market fundamentals continued to support price growth as office employment outpaced overall employment growth and construction levels across most markets remained moderate. Pricing in the Prime Office Metros Index advanced by an even stronger 13.4% in the 12 months ending in June 2015. In particular, larger core office properties have had strong pricing growth because many investors view them as an alternative investment offering good relative value.
- U.S. RETAIL INDEX MOVED TO WITHIN 5% OF PRE-RECESSION PEAK. The quarterly U.S. Retail Index increased 2.1% in the second quarter of 2015 and 10.7% in the 12 months ending in June 2015. With the recent jump, retail property pricing is now just 5.2% below its previous cyclical peak, the second-best performance among the four major property types after multifamily. Pricing gains aggregated in top-tier trade areas in the core coastal markets over the last year, and the Prime Retail Metros Index climbed 16.2% above its prior peak after advancing 18.8% over the 12 months ending in June 2015.
- PRIME INDUSTRIAL METROS’ INDEX GROWTH BEAT OVERALL MARKET. The performance of industrial sector’s fundamentals has been impressive, with vacancies falling to new cyclical lows and robust rent growth increasing more than 5% annually for the 12-month period ending in June 2015. This solid performance has attracted capital, and the quarterly Industrial Index advanced by 8.8% in the 12 months ending in June 2015. After recovering 38.1% from its trough, the Industrial Index reached within 8.5% of last cycle’s peak, as of June 2015. The Prime Industrial Metros Index has further to go in its recovery but made strong gains during the 12-month period ending in June 2015. After a 9.3% increase during this period, it remained 17.3% below last cycle’s peak. This suggests more room for price appreciation as rents continue to rise, but space markets will become increasingly competitive as construction levels increase.
- HOSPITALITY INDEX INCREASED MORE THAN 50% FROM ITS RECESSIONARY NADIR. After suffering the biggest peak-to-trough decline of any of the property types in the last recession, the U.S. Hospitality Index surged upward by 15.4% in the 12 months ending in June 2015, soaring 53.4% above its recessionary trough. National hotel occupancies have reached their highest levels since the mid-1990s, which has supported room rate and RevPAR growth as well as investor demand for hotel properties.
- VOLATILE U.S. LAND INDEX POSTED STRONG GROWTH BUT STILL WELL BELOW PREVIOUS PEAK. CCRSI’s Land Index gained 23.8% in the 12-month period ending in June 2015, driven by increased demand for development sites across all property sectors. Despite strong gains over the last year, the Land Index is still in the earlier stages of recovery. It did not reach its trough for this cycle until 2012, well after most other property types, and remains 19.5% below last cycle’s peak.
Quarterly CCRSI Regional Results
- THREE OF THE FOUR NORTHEAST PROPERTY TYPE INDICES SURPASSED PRE-RECESSION PEAK LEVELS. Thanks to its strong concentration of top-tier markets that were a magnet for real estate investment early in the cycle, the Northeast Composite index had the shallowest peak-to-trough decline in the downturn and surpassed its previous peak by 9.6% as of the second quarter of 2015. The 14.9% price growth in the 12 months ending in June 2015 for the Northeast Composite index was the strongest rate among the four regions. The Northeast Multifamily and Retail indices led the recovery and reached previous peak pricing in 2014, while the Industrial Index soared past its prior peak pricing by 1.7% in the second quarter of 2015. The Northeast Office Index hovers just 2.8% below its prior peak as of the second quarter of 2015.
- WEST COMPOSITE INDEX BACK TO WITHIN 6.2% OF PREVIOUS PEAK. After the Northeast region, the quarterly West Composite Index had the second-strongest price recovery since the recession. The West Multifamily and Office indices led growth in the region in the 12 months ending in June 2015, gaining 15.6% and 14.6%, respectively. Strong fundamentals in core markets including Los Angeles and San Francisco have propelled pricing in the West Multifamily Index to 19% above its prior peak.
- MULTIFAMILY WAS STRONGEST PERFORMER IN SOUTH REGION. Of the four regional property type indices that make up the South Composite Index, the South Multifamily Index was the only one to grow at a double-digit rate for the 12 months ending in June 2015, helping the index to surpass its previous peak level by 0.7%. Pricing has rebounded in several fast-growing multifamily markets, including those in Texas and North Carolina that enjoyed exceptionally strong demand growth, falling vacancies, and solid rent gains. The South Office Index was the second-best performer in the region, growing 9.6% in the 12 months ending in June 2015, although still 16.5% below its prior peak level.
- MIDWEST CONTINUES TO LAG BEHIND OTHER REGIONS IN RECOVERY BUT GAINING MOMENTUM. The Midwest Composite Index did not begin its recovery until 2012, nearly two years later than indices in the Northeast or West regions. Midwest markets have benefited as more investor capital has moved to secondary and tertiary markets over the last year in search of higher yields. The Midwest Composite Index expanded by 12.6% in the 12 months ending in June 2015, trailing just behind the Northeast region. However, the Midwest Composite Index has the furthest to go in the recovery, with current pricing down 17.5% 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.
Becky Carr, Chief Marketing Officer, CoStar Group (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 the CCRSI website at: http://www.costargroup.com/costar-news/ccrsi
About CoStar Group, Inc.
CoStar Group (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. LoopNet is the most heavily trafficked commercial real estate marketplace online with more than 9.8 million registered members. Apartments.com, ApartmentFinder.com and ApartmentHomeLiving.com form the premier online apartment resource for renters seeking great apartment homes and provide property managers and owners a proven platform for marketing their properties. CoStar Group operates websites with over 23.6 million unique monthly visitors in aggregate as of June 2015. Headquartered in Washington, DC, CoStar maintains offices throughout the U.S., in Europe and Toronto with a staff of approximately 2,900 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 will not continue or produce the results suggested by such trends, including the risk that robust transaction activity during second quarter 2015 is not indicative of the strength of capital flows for the remainder of the year; the risk that space markets will not become increasingly competitive as construction levels increase; the risk that Prime Industrial Metros do not experience more price appreciation; that the Land Index is not in the earlier stages of recovery; 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, 2014, and Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, 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.