Latest CoStar Commercial Repeat Sale Analysis: Year-End Trends Continue Commercial Real Estate Pricing Gains In 2013

WASHINGTON, Feb. 13, 2014 (GLOBE NEWSWIRE) -- This month's CoStar Commercial Repeat Sale Indices (CCRSI) provide the market's first look at December 2013 commercial real estate pricing. Based on 1,648 repeat sales in December 2013 and more than 125,000 repeat sales since 1996, the CCRSI offers the broadest measure of commercial real estate repeat sales activity.

December 2013 CCRSI National Results Highlights
  • COMMERCIAL REAL ESTATE RECOVERY ADVANCES IN 2013: The recovery in U.S. commercial real estate advanced in 2013 as broad gains in net absorption, rents, sales activity and pricing extended across markets and property types. Driven by steady economic growth and solid job gains of 2.3 million or 1.7% in 2013, aggregate net absorption across the four major property types was the highest since the recovery began. Meanwhile, new supply remained well in hand, with the exception of the multifamily property sector, which has seen a notable increase in new construction. Year-end 2013 vacancy rates fell across the board from one year earlier, reaching new cyclical lows in both the apartment and industrial sectors over the last year.  
  • RENTS TRENDING UP AS VACANCY DECLINES: The improvement in market fundamentals has tilted pricing power in the favor of landlords. Rents have surged 14% from the trough of the cycle in the apartment market, with more modest rent recoveries of near 6% in the office and industrial segments since bottoming out in late 2010/early 2011. Even the beleaguered retail property sector, which experienced rent losses into 2012, saw a turnaround in the last year, with retail rents growing a modest 1.9% in 2013. Investor demand for all commercial property types also remained strong, as overall sales volume increased 16% from 2012.  
  • IMPROVING MARKET FUNDAMENTALS FUEL PRICING GAINS: The two broadest measures of commercial property pricing in the CCRSI, the U.S. value-weighted index and U.S. equal-weighted index, each posted strong gains of 11.2% and 7.6%, respectively, in 2013. Reflecting the stronger price appreciation of larger properties in core markets, pricing in the value-weighted index has now risen to within 5.5% below the previous peak level set in 2007. Meanwhile, the equal-weighted index, which is more heavily influenced by smaller transactions, is still 25% below the prior peak, suggesting that there is plenty of room left in the recovery for appreciation in lower-end properties and those in secondary markets as the cycle matures.  
  • PRICE GROWTH EXTENDS TO ALL PROPERTY TYPES. The Multifamily Index was at the forefront of the commercial real estate recovery, driven by a higher availability of debt financing and a voracious appetite on the part of investors for leased assets in established markets such as New York, Washington, DC, Boston and San Francisco. The Multifamily Index rose 36% over the last three years, more than doubling the gains in other property types during that timeframe. As of the fourth quarter of 2013, aggregate multifamily prices were off 11.5% from the previous high water mark reached in 2007, while pricing in the other property types remained at least 20% below prior peak levels. However, most apartment markets are now in the expansionary phase of the cycle, in which construction of additional units are expected to begin to exert pressure on occupancies and rent growth. This month's CCRSI reflects recent pricing trends. The Multifamily Index increased by 7% in 2013, amid stronger gains of 14.1% in the retail sector and 8.9% in the office sector, while pricing in the industrial segment gained 5.9% for the year.  
  • DECEMBER CAPPED BUSY YEAR FOR TRANSACTION ACTIVITY: Repeating the seasonal sales pattern witnessed over the last several years, commercial real estate transaction activity spiked in the final month of the year as investors rushed to close deals prior to year-end. This helped to lift the total number of repeat sales recorded in 2013 to a record high of nearly 15,000, an increase of 11.2% from 2012's total. Both the investment grade and general commercial segments were heavily traded as improving market fundamentals and higher yields relative to other asset classes continued to fuel strong investor interest in commercial real estate. However, the spread between cap rates in core markets and the risk-free rate have come in substantially over the last year. This, along with an expected rise in interest rates over the near term, suggests that investors will continue to look for yield in secondary markets and property types.

Monthly CCRSI Results, Data through December of 2013
  1 Month Earlier 1 Quarter Earlier 1 Year Earlier Trough to Current
Value-Weighted U.S. Composite Index 0.8% 2.8% 11.2% 52.9% 1
Equal-Weighted U.S. Composite Index 0.9% 2.9% 7.6% 18.7% 2
 U.S. Investment Grade Index 1.0% 2.8% 13.6% 31.6% 3
 U.S. General Commercial Index 0.8% 3.3% 6.5% 17.1% 4
1 Trough Date: January, 2010  2 Trough Date: March, 2011  3 Trough Date: October, 2009    4 Trough Date: March, 2011

Quarterly CCRSI Property Type Results
  • Broad pricing gains in nearly every property sector demonstrate the depth of the recovery in commercial real estate prices in 2013. Pricing in the overall market has increased more rapidly than in the Prime Markets Indices over the last year as well, indicating that investors are either being priced out of primary markets, or have an increased appetite for risk as market fundamentals improve.  
  • A reduction in vacant 'shadow supply' space left over from the recession, improving job numbers, and muted new construction supported price growth of 8.9% in the Office Index in 2013. Pricing has already surpassed or is approaching the prior pricing peak in core markets such as New York, which has limited growth in the Prime Office Metros Index over the last year. Meanwhile, investor interest in non-primary markets has increased, with office sales up by nearly 50% in markets such as Atlanta, Dallas and Miami.  
  • The Retail Index posted the most impressive increase over the last year, increasing 14.1% in 2013 as performance gains ramped up to complement the improving market fundamentals. The overall retail market outperformed the Prime Retail Metros Index over the last year indicating that investors are branching out beyond core assets.  
  • Local economic growth was the strongest driver of improvement in market fundamentals in the industrial sector in 2013. Those markets with the greatest vacancy declines were not super-regional distribution hubs, but rather local economies benefiting from the ongoing housing recovery, stronger demographics, and growth in the technology and energy industries. Pricing gains broadly reflected the movement in market fundamentals, as the Industrial Index advanced by a solid 5.9% in 2013, while the Primary Markets Index dipped by 2%.  
  • The Hospitality Index slipped by 7.4% in 2013, reflecting the recent slowdown in revenue per available room (RevPAR) growth. Hotel performance had a robust post-recession bounce-back in 2010-2011, driven by pent-up demand for business and leisure travel. The hotel occupancy recovery has since slowed over the last two years, which has weighed on both room rate and RevPAR growth, and in turn, investor demand in the sector.  
  • The Land Index continues its slow recovery.  Driven in large part by demand for multifamily development sites, and a stronger single family market, the Land Index made modest gains of 6.5% in the fourth quarter of 2013 from its cyclical low in 2012.

Quarterly CCRSI Regional Results
  • The Northeast Composite Index has led the recovery among the CCRSI regional indices, thanks to its strong concentration of top-tier markets that have been a magnet for investment early in the recovery cycle. In 2013, pricing in the Northeast rebounded to within 7.6% of the prior peak reached in 2008. This outperformance in pricing can be largely attributed to the strong rebound in the Multifamily Index, which has soared well past the prior peak pricing level, the only regional property type index to do so. However, in Northeast markets such as New York and Boston, pricing has reached new historical highs for apartment and office assets, and cap rates in the low 4% range (and sometimes lower) are not uncommon.  As a result, price gains in the Northeast have expectedly slowed, to just 2.9% in 2013.  
  • The West Composite Index has recovered to within 26% of its previous peak reached in 2007, the second strongest price recovery among the CCRSI regional indices after the Northeast region. In 2013, the West's office, retail and industrial segments posted double-digit price gains, while the multifamily segment, which had the strongest performance earlier in the recovery, gained 4.2% last year.  Stellar demographic trends and employment growth in tech-driven markets, including Seattle, San Francisco and San Jose, have driven recent exceptional price growth.  
  • The South Composite Index increased by 6.5% in 2013, with the lion's share of that increase attributable to strong performance in the retail segment, which increased 13.5% from 2012 to 2013. Retail price growth has rebounded in fast-growing markets in Texas and North Carolina that have benefited from positive rent growth, falling vacancies and development levels that remain well below historical standards.  
  • The Midwest has been the laggard in the recovery, with most property type indices here bottoming out in 2012, nearly two years after the pricing recovery began in the Northeast and West regions. Demand growth is generally more subdued in this region, but the Midwest does offer investors stability and appreciably higher yields. As investment capital has continued to seek out secondary and tertiary markets over the last year in search of yield, Chicago, Kansas City and Columbus have benefited, with a surge in investment activity and price growth. In 2013, the Midwest Composite Index expanded by 6.1%, with the strongest growth coming from the multifamily sector, which leapt forward 19%, while the office and retail sectors made respectable gains of closer to 8%.

Several charts accompanying this release are available at

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).

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