Summer Rally In CRE Pricing Follows Strong First-Half Performance


Commercial real estate prices posted solid gains for the second straight month in August, with pricing of larger transactions reaching its highest level since the Great Recession and prices of smaller, less expensive deals seeing their largest year-over-year increase since the peak of the real estate boom six years ago.

The U.S. Value-Weighted Composite Index and the U.S. Equal-Weighted Composite Index, the two broadest measures of CRE pricing in the CoStar Commercial Repeat Sale Indices (CCRSI), each showed major substantial gains in August,reflecting strong net absorption and demand in the first half of 2012.

The two components of the equal-weighted U.S. Composite Index, which include investment grade and general commercial properties, both progressed in August, a sign that the recovery in property pricing has reached across all sizes and quality characteristics of the CRE sector.

The U.S. value-weighted index, which weights each repeat-sale by transaction size or value and therefore is heavily influenced by larger transactions, reached its highest level since early 2009, when the recession still had a few months to play out. It has now improved by a total 34.1% since the start of 2010, reflecting dramatically stronger demand by investors for primary gateway metro areas and institutional-grade multifamily assets that have fueled the pricing recovery for commercial property.

The equal-weighted index which weights each repeat-sale equally, reflects the influence of the more numerous smaller transactions across the country, has accelerated, with the 7.6% year-over-year increase in August 2012 the largest such gain since August 2006. Despite the increase, cumulative gains in the equal-weighted Index have lagged behind those in the value-weighted Index, reflecting a slower rate of recovery of tenant demand in the general commercial segment.

The solid month of sales strength largely reflect the strong leasing and absorption activity seen in the first half of the year. Net absorption of office, retail, and industrial spaceslowed significantly during the third quarter of 2012 to less than one-third of second-quarter levels, and less than half of first-quarter levels, mostly due to a leasing slowdown among smaller general commercial properties.

In fact, general properties posted negative net absorption for the first time since early 2010. If tenant demand continues to draw back due to further macroeconomic weakness and uncertainty, near-term transaction volume and pricing could suffer, according to the latest CCRSI report.

Distressed sales continued to decline in August, and the percentage of commercial property selling at distressed prices during the month was the lowest since mid-2009.

This month’s CoStar Commercial Repeat Sale Indices (CCRSI) provides the market’s first look at August 2012 commercial real estate pricing. Based on 878 repeat sales in August 2012 and more than 100,000 repeat sales since 1996, the CCRSI offers the industry’s broadest measure of commercial real estate repeat sales activity.

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