Recovery In CRE Sales, Pricing Up Year over Year, Despite Sluggish First Quarter
For the Fourth Straight Year Since 2010, Seasonal Slowdown Causes Early Declines In Pricing And Sales Activity
Just like clockwork, after ending 2012 on an upswing, commercial real estate pricing softened in the first three months of 2013, according to the latest findings from the CoStar Commercial Repeat Sale Indices (CCRSI).
Despite uneven performance in the first quarter, CRE prices have still increased appreciably from year ago levels and the recovery continued to widen, with all regions and property types experiencing year-over-year pricing gains.
Also boding well for investment activity through the balance of 2013, lending volume accelerated across all capital sources in the first three months.
The equal-weighted CCRSI index, which reflects smaller transactions that make of the bulk of total market volume, increased 5.7% from March 2012. Despite the decline in the equal-weighted index for the month of March, both of its components, the Investment Grade Index and General Commercial Index, remained 11% and 4.9%, respectively, above the same period last year.
The value-weighted index reflecting larger transactions expanded by 8.1% during the same period.
Both indices turned slightly negative in March, however, and for the fourth straight year, a modest seasonal pricing decline in the first quarter followed a burst of strength in the final three months of the previous year.
“These year-end spikes have been consistent with elevated transaction volume as investors rush to close deals, while the first-quarter declines have coincided with a return to more typical trading activity,” noted Dr. Ruijue Peng, CCRSI author. “This volatility is a normal and expected occurrence and should not be interpreted as a regression in real estate prices.”
As expected, the first quarter’s total of $12.1 billion in composite sale-pair volume was well below the record-setting level reached in the final quarter of 2012. Sale-pair volume totaled $5.5 billion in March 2013, stronger than the $3.3 billion monthly average recorded during January and February.
Yet, transaction volume for first-quarter 2013 was in line with the same period a year and well above the first quarter totals of 2011 and 2010. CCRSI sales volume reflects the subset of sale-pairs included in the CCRSI analysis and not the commercial real estate market at large.
“Transaction volume appears to be responding to acceleration in lending volume across debt capital sources, including CMBS, banks, life insurers and GSEs, which has created a favorable environment for commercial real estate transaction activity,” Dr. Peng stated.
In another positive sign of market strength, the percentage of commercial properties selling at distressed prices dropped to 16.4% in March from 25.5% in March of last year.
The quarterly CCRSI data also revealed both the seasonal slump and the year-over-year gain, demonstrating the breadth of the price recovery as capital fans out into to secondary markets and across all major property types.
Multifamily pricing continued to post the strongest results during the first quarter, though there are signs of a slowing in apartment fundamentals, mainly as a result of new supply. The multifamily index gains of 0.8% in the first quarter were the best of the four property types, but a notable pullback from its quarterly average pace of 3.2% over the last two years.
The office index made modest gains, rising by 2.8%, reflected in the slow but steady improvement in market fundamentals. Despite the seasonal dip, the energy and technology influenced Prime Office Markets Index advanced by 23.4% over the last year, the strongest gain in the core market segment among major property types.
Industrial index pricing gained by a robust 7.7% from its trough in the first quarter, the second-strongest annual gain behind multifamily. Big-box distribution facilities in primary logistics hubs have led the recovery, reflected in the stronger 15.5% gain in the Prime Industrial Metros Index over the last year.
The retail index posted modest price gains of 2.9% over the last year as vacancies have slowly but steadily improved. Retail property pricing is now 8% above its early 2011 trough.
With red-hot demand for apartment development sites and an improving single-family market, the Land Pricing Index gained 1.5% in the first quarter, for a cumulative 6.5% price gain over the last year.
The Hospitality Pricing Index increased by 11% from the first quarter of 2012, and with average room rates on the rise in most markets, hotels are becoming a more desirable asset class among investors.
All four major U.S. regions posted positive year-over-year pricing gains, driven primarily by superior performance in the industrial and multifamily sectors. The Northeast Composite Index, bolstered by strong price growth in a handful of multifamily markets, remains at the forefront of the recovery.
The Midwest Composite Index, the slowest of the four regions to recover, rose 5.9% year over year as capital has flowed into secondary metros and more property types. The South and West Composite Indices continued a moderate year-over-year recovery, increasing by 5.2% and 3.7%, respectively.
Source: CoStar, Randyl Drummer, May 15, 2013