Rising Sales Volume, Deal Value Show Continued Investor Faith in CRE

Posted on July 12, 2011

Led by a near doubling in the average dollar size of transactions, year-over-year commercial real estate sales volume rose more than 150% in May, according to the latest release of the CoStar Commercial Repeat Sale Indices (CCRSI).

The average price of an investment-grade transaction was $33.2 million in May — nearly double the average of $16.9 million in April — while the average dollar size for general commercial property deals was $1.7 million, up slightly from $1.65 million the previous month.

The dollar volume of investment-grade sales also continued to rise significantly in May, jumping more than 191% on a year-over-year basis. Consequently, investment-grade sales comprised nearly four-fifths of the total CRE sales volume pie, jumping to 79.2% in May from 61.9% the previous month. General-grade property sales volume rose 62% in May from a year ago.

“The May pricing increase reported this week, combined with the robust increase in monthly sales volume, shows that investors continue to seek out commercial real estate during uncertain times,” said Chris Macke, senior real estate strategist for CoStar Group, Inc.

Macke said a number of large recapitalizations in New York City helped drive up the average dollar size of May sales transactions.

“This is good because it signals a matching up of the money on the sidelines with those who need it, but for whatever reason haven’t been attracting that capital to date,” Macke said.

Investment-grade property sales volume in the 10 largest U.S. markets decreased to 38.7% of total commercial sales in May, falling below the two-year average of 45.8%, CCRSI data showed. Yield-hungry institutional investors have extended their searches for deal beyond the major metro areas as bidding for top-tier properties has driven up pricing in the most coveted U.S. markets.

“Investors are being forced to look elsewhere to get the returns they are seeking, but maybe most importantly, they’re feeling confident enough to chase those higher yields,” Macke observed.

For the composite index, the percentage of total property trades that are distressed declined slightly from 29.4% in April to 28.3% in May, the lowest level since December 2009. The percentage of distressed sales in the investment-grade index declined to 32.8% in May from 41% the previous month.

By property type, the highest proportion of distress in May was in the hospitality sector at 37.8%, followed by multifamily at 30.9%, office at 27.1%, retail at 26.7% and industrial at 23%.

The CCRSI tracked more than 829 repeat sale transactions in May, down slightly from 854 in April. However, 2011 overall has seen significant upward movement in sale pair volume since 2009. January of that year appears to have been the cyclical low point of the downturn in terms of pair volume, when 385 transactions were recorded. Since its inception, the CCRSI has recorded more than 100,000 repeat sale transactions.

Sales of properties that previously traded hands between the boom year of 2005 and the early part of the down cycle in 2008 experienced an average annual loss of 6% in May. That’s the lowest since December 2009, but still 15 times greater than the average loss of just 0.4% for transactions with a prior sale date during between 2009 and 2010, the depths of the real estate down cycle.

“Clearly, we are seeing, as we do in every cycle, that location can be trumped by poor timing decisions such as buying at the top of the market,” Macke said.

The CoStar Composite Commercial Repeat Sale Index increased by 1.6% in May and is now 6.8% below the same period last year, and 34.4% below its August 2007 peak. The Investment Grade Commercial Repeat Sale Index increased 4.4% in May and is now 5% above the same period last year, and 35% below its peak nearly four years ago.

CoStar’s General Grade Commercial Repeat Sale Index increased by 0.9% in May, now sitting at 8.6% below its year-ago level, and down 34.5% from the August 2007 peak.

CoStar will present the mid-year and quarterly updates of the national and regional indices in the June data release scheduled in early August.