CoStar's U.S. Composite CRE Price Index Approaches Prerecession Peak Levels

Posted on July 17, 2014

Property Price Indices Post Double-Digit Annual Gains in May

The two broadest measures of aggregate pricing for commercial properties within the CoStar Commercial Repeat Sales Indices (CCRSI)–the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index–increased by 0.9% and 1.2%, respectively, in the month of May 2014, and have increased 11.4% and 11.7% respectively, year over year, reflecting a broad improvement in market fundamentals seen across all property types.

The value-weighted U.S. Composite Index, which is heavily influenced by core property transactions, has now risen within 1% of its prerecession peak level reached in 2007, while its equal-weighted counterpart, which is more influenced by smaller non-core property sales, has recovered to within 20% of its 2007 high water mark.

This month’s CoStar Commercial Repeat Sale Indices (CCRSI) provide the market’s first look at May 2014 commercial real estate pricing and is based on 1,282 repeat sales in May 2014 and more than 125,000 repeat sales since 1996.

Momentum Picks Up in The General Commercial Segment

Within the equal-weighted U.S. Composite Index, the U.S. General Commercial Index, which includes lower-tier properties, advanced by 12.7% for the 12-month period ended in May 2014, while the U.S. Investment Grade Index, which broadly encompasses upper-middle tier properties, expanded by 7.0% for the same time period.

As pricing for core assets has continued to rise, investment activity has moved further out on the risk spectrum to include a broader scope of markets and property types, which has pushed up pricing at the low end of the market.

Improvements in Market Fundamentals Underpin Growth in Commercial Property Pricing

Net absorption for the three major property types – office, retail, and industrial – climbed to 369.5 million square feet for the year ending in the second quarter of 2014, an increase of 1.6% from the prior 12-month period.

Although the most recent annual absorption total is still just 60% of annual demand gains posted in 2007, with current low construction levels it was enough to lower vacancy rates below the trailing 10-year average for the office and retail sectors, while the average vacancy for the industrial sector is now below pre-recession levels.

Reflecting recent movements in pricing at the low end of the market, net absorption in the General Commercial segment increased by 9.8% for the year ending in the second quarter of 2014, compared with a decline of 1.5% in the Investment Grade segment.

Distress Levels Continue To Dissipate

The percentage of commercial transactions involving distressed assets has declined to 10.5% in May 2014 from over 17% one year earlier. in the multifamily and industrial sectors, the distress share of total sales fell into the single digits, while it remains comparatively high at 11% in the retail sector and 17% in the office sector, suggesting there is more room for pricing appreciation.

The share of distress trades in late-recovery markets such as Chicago, Atlanta, and Detroit remain near 20%, while in the early-recovery, coastal markets of Los Angeles, San Francisco and San Jose, distress levels are nearly non-existent.