May 13, 2015
Property Prices Surge Upward In the First Quarter Of 2015
Broad Pricing Recovery Continued As All Regional and Major Property Type Indices Advanced At a Double-Digit Annual Rate
Broad Pricing Recovery Continued As All Regional and Major Property Type Indices Advanced At a Double-Digit Annual Rate
CCRSI RELEASE – MAY 2015
(With data through March 2015)
This month's CoStar Commercial Repeat Sale Indices (CCRSI) provides the market's first look at March 2015 commercial real estate pricing. Based on 1,303 repeat sales in March 2015 and more than 135,000 repeat sales since 1996, the CCRSI offers the broadest measure of commercial real estate repeat sales activity.
CCRSI National Results Highlights
- COMPOSITE PRICE INDICES CONTINUED TO RISE IN THE FIRST QUARTER OF 2015. Strong capital flows and healthy market fundamentals supported price gains across the high and low ends of the CRE market during the first quarter of 2015. The value-weighted U.S. Composite Index, which is influenced by high-quality assets in core markets, advanced by 4.7% in the first quarter of 2015 and is now 11% above the previous peak in 2007. The equal-weighted U.S. Composite Index, which weighs each transaction equally and therefore reflects the impact from more numerous smaller deals, rose 4.8% in the first quarter of 2015, although it remains 10% below its previous peak level.
- GENERAL COMMERCIAL SEGMENT LED GROWTH WITHIN EQUAL-WEIGHTED INDEX. The CCRSI Composite Index consists of two components: a General Commercial segment, which encompasses smaller deals typical of secondary and tertiary markets, and an Investment Grade segment, which encompasses larger-sized, high-quality properties that match the type most often purchased by institutional investors. The General Commercial segment advanced by 5% in the first quarter of 2015 and 15.9% for the 12 months ending in March 2015, as non-prime markets continued to attract more investment. The index has now moved to within 11.3% of its previous peak. Meanwhile the Investment Grade Index, which is further along in the recovery, posted solid but more modest growth of 4.6% in the first quarter of 2015 and 10.5% in the 12 months ending March 2015. Reflecting its earlier recovery, that index moved to within 6% of its prior peak level In March 2015.
- ALL MAJOR PROPERTY TYPE AND REGIONAL INDICES ADVANCED AT DOUBLE- DIGIT ANNUAL RATES THROUGH MARCH 2015. As the CRE recovery extended to more markets and property types, all major property types and regional sectors posted double-digit annual gains through March 2015. The Multifamily Index has already fully recovered, eclipsing its previous peak, while the Retail and Industrial Indices advanced to within 10% of their previous peak levels and the Office Index remained 15% below its previous high-water mark in 2007. Among CCRSI’s regional indices, strong investor demand in core coastal metros propelled the Northeast Composite Index 6.1% above its prior peak, while the West Composite Index moved to within 8.4% of its prior peak in March 2015.
- FIRST QUARTER TRANSACTION VOLUME ACHEIVED RECORD HIGH IN 2015. After reaching a new high in 2014, property sales transaction activity remained strong in the first quarter of 2015. While the first quarter is typically the weakest quarter of the year in terms of sales activity, first quarter 2015 investment volume of $27.8 billion was still more than 50% higher than in the first quarter of 2014, suggesting that capital flows will continue to be strong this year. The low cost of debt has supported robust deal volume, while low interest rates have kept spreads over the risk-free rate wide, despite historically low cap rate levels.
Quarterly CCRSI Property Type Results
- ALL PROPERTY TYPE INDICES POSTED DOUBLE-DIGIT GAINS. Demonstrating the depth and breadth of the real estate recovery, the six CCRSI property type indices posted solid pricing gains in the 12 months ending in March 2015. While the recent run-up in pricing in many core markets has limited growth in CCRSI’s prime industrial and apartment indices, the prime office and retail indices grew faster than the overall market average for the 12 months ending in March 2015.
- MULTIFAMILY INDEX LED GROWTH IN MAJOR PROPERTY TYPES. The U.S. Multifamily Index continued to grow steadily, increasing by 14.8% for the 12 months ending in March 2015, the strongest annual rate of the four major property types. The Multifamily Index reached its prerecession peak in the second half of 2014, and now stands 9.7% above its 2007 high. Driven by strong investor interest in Class A assets in core markets, pricing in the Prime Multifamily Metros Index has led all repeat sale indices in the recovery and is now 27.6% above its previous peak in 2007. Most apartment markets are now in the expansionary phase of the cycle, where construction is beginning to exert pressure on occupancies and rent growth. Because of steep competition and pricing for core multifamily assets, recent gains in the Prime Multifamily Metros naturally slowed to 10.3% for the 12 months ending in March 2015, versus 24% in the same period one year prior.
- IMPROVING OFFICE FUNDAMENTALS SUPPORTED BROAD PRICING GAINS. Prices for office property increased 13.9% in the last-12-month period ending in March 2015 as office-employment growth continued to outpace overall employment growth, and still-moderate levels of construction supported an improvement in fundamentals. Pricing in the Prime Office Metros Index advanced by an even stronger 19% annually for the 12 months ending in March 2015. In particular, the sales of larger core office properties that are more bond-like have had strong pricing growth because they are viewed as an alternative investment offering good relative value.
- PRIME RETAIL METROS INDEX SURPASSED PRERECESSION PEAK. The U.S. Retail Index was up 43.5% from its recessionary low and 13.5% for the 12 months ending in March 2015. With the recent jump, retail pricing is now just 6.8% below its previous cyclical peak, the best showing among the four major property types outside of multifamily. Pricing gains aggregated in top-tier trade areas in the core coastal markets over the 12 months ending in March 2015, and the Prime Retail Metros Index is now 14.8% above its prior peak after advancing 31.4% for the same period. Late-recovery markets, especially those in the Sun Belt with strong population demographics and income growth, offer more upside potential.
- INDUSTRIAL INDEX GROWTH SURPASSED PRIME METROS INDEX. Industrial vacancy rates fell to lows not seen since before the last recession, and rent growth, usually unremarkable for industrial property, remained robust, growing over 5% annually for the 12 months ending in March 2015. Not surprisingly, this impressive performance attracted investor capital, and the Industrial Index advanced by a solid 12.4% in the 12 months ending in March 2015. Since recovering 36.9% from its trough, the Industrial Index is now within 10% of its peak in the last cycle. The Prime Industrial Metros Index has further to go in the recovery. After a 5.1% increase over the last 12 months ending in March 2015, the Prime Industrial Metros Index is still below last cycle’s peak, suggesting more room for price appreciation as rents continue to rise. However, these prime metro areas are expected to become increasingly competitive as construction levels rise.
- STRONG OCCUPANCY TRENDS FUELED HOTEL INDEX GROWTH. The Hospitality Index surged upward by 20.6% during the 12 months ending in March 2015, after relatively modest growth of just 4% in the same period in 2014. National hotel occupancies have reached their highest level since the mid-1990s, fueling room rate and RevPAR growth, as well as strong investor demand.
- LAND INDEX SEES STRONG GROWTH BUT REMAINS MORE THAN 20% BELOW PREVIOUS PEAK. The Land Index gained 23.1% in the 12 months ending March 2015, driven by increased demand for development sites across all property sectors. Despite strong gains over the last year, the index is still in the earlier stages of its recovery having not reached its trough for the current cycle until 2012, well after most other property types. The Land Index remains 23.1% below its previous peak in the last cycle.
Quarterly CCRSI Regional Results
- NORTHEAST COMPOSITE INDEX SURPASSED ITS PRERECESSION PEAK. The Northeast Composite Index had the shallowest peak-to-trough decline in the downturn and has already surpassed its previous peak by 6.1%, thanks to its strong concentration of top-tier markets that were a magnet for investment early in the cycle. Pricing in the 12 months ending in March 2015 registered a 14.8% increase, the second-strongest annual growth rate after the Midwest region. This outperformance can be largely attributed to the strong rebound in the Northeast Multifamily and Retail Indices, which soared past their prior peak pricing levels by 31.6% and 15.1%, respectively, as of March 2015.
- WEST COMPOSITE INDEX RECOVERED TO WITHIN 8.4% OF PREVIOUS PEAK. The West Composite Index also posted a strong price recovery, increasing to within 8.4% of its previous peak. For the 12 months ending in March of 2015, the West’s multifamily and retail segments posted the strongest price gains, of 16.4% and 13.2%, respectively. The West Multifamily Index is now 15.8% above its prior peak, after stellar demographic trends and employment growth in tech-driven markets such as Seattle, San Francisco and San Jose which drove exceptional price growth.
- SOUTH COMPOSITE INDEX INCREASED BY 14.2%. Recent gains in the South Composite Index were driven by the strong performance of the region’s office and multifamily property sectors in particular. Price growth has rebounded in fast-growing markets, especially in Texas and North Carolina, which experienced exceptionally strong demand growth, falling vacancies and solid rent gains. The South Multifamily Index posted the strongest annual growth in the regional composite index of 16.7% in the 12 months ending in March 2015, while the South Office Index was not far behind, with growth of 12% in the same period. As seen in the other regions, the South Multifamily Index had the strongest recovery of all the property types, reaching just 2% under its prior peak.
- MIDWEST REGION HAS LAGGED BEHIND OTHERS IN RECOVERY, BUT GAINING MOMENTUM. The Midwest Composite Index did not bottom out until 2012, nearly two years later than indices in the Northeast or West regions. Demand growth has been generally more subdued in this region, but the Midwest does offer stability and appreciably higher yields. As more investment capital has moved to secondary and tertiary markets over the last year in search of yield, Midwest markets have benefited, seeing a surge in investment and price growth. In the first quarter of 2015, the Midwest Composite Index expanded by 16.6%, the strongest growth of the four major property types. However, the index has the most ground to make up in the recovery, with current pricing down 19.4% 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.
Mark A. Klionsky, Senior Vice President-Marketing (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. Through LoopNet, the Company operates the most heavily trafficked commercial real estate marketplace online with more than 9.6 million registered members. Apartments.com is a premier online apartment resource for renters that matches apartment seekers with great apartment homes and provides property managers and owners a proven platform for marketing their properties. CoStar operates websites with over 22 million unique monthly visitors in aggregate during March 2015. Headquartered in Washington, DC, CoStar maintains offices throughout the U.S., Canada and Europe with a staff of approximately 3,000 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 first quarter 2015 investment volume is not indicative of the strength of capital flows for the remainder of the year; the risk that markets do not become increasingly competitive as construction levels rise and as expected; the risk that late recovery markets, including Prime Retail Metros, do not produce more upside; the risk that Prime Industrial Metros do not experience more price appreciation; 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 March 31, 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.