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DeclineCommercial Property Sales Slowdown as Investors Pull Back

First Quarter Leasing Levels, Net Absorption Remained Strong Despite Fewer Sales, Price Decline

Commercial real estate prices and investment volume declined for the second consecutive month in February, despite robust leasing that bolstered net absorption and CRE fundamentals in the first quarter of 2016, according to the new release of CoStar Commercial Repeat-Sale Indices (CCRSI) data.

Both the value-added and equal-weighted U.S. Composite Indices, the broadest measures of aggregate pricing for commercial properties within the CCRSI, declined in February. The value-weighted index, influenced chiefly by larger transactions, declined by 0.6%. The equal-weighted index, comprised of a higher number of smaller deals, declined 0.8%.
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Investment sales volume across the commercial property sector also declined from last year's torrid pace. The number of observed repeat-sale trades dropped 12.1% over the last 12 months ending in Feb. 2016, compared with the same period in 2015.

The drop in sales activity was apparent in both the high and low-end sectors as the composite pair count fell 10% in the investment-grade segment of the market and 12.6% in the general commercial segment in the first two months of 2016 compared with the first two months of 2015.

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Leasing activity remained strong, with total net absorption of 155.1 million square feet across the office, retail, and industrial markets, contributing to a total of 655.1 million square feet of net absorption for the 12 months ending in March 2016, a 10.7% increase from the same period last year.

Indicating a 'flight to quality' among tenants, investment-grade properties posted the strongest year-over-year absorption growth, increasing 14.8% in the past 12 months compared to last year's period, while the general commercial segment expanded by 1.9%.

The two-month slowdown in CRE price growth suggest that pricing may reach a plateau for the cycle in 2016, according to CoStar's repeat-sale analysis, with trends indicating the two composite indices could level off this year after several years of steady appreciation at a 1% average monthly clip.

Investors have enjoyed a remarkably strong performance in the commercial property markets over the past several years, with limited new construction and the ongoing economic expansion helping to hold vacancies near cyclical lows and spurring rent growth.

The performance is apparent in the CCRSI value-weighted index, which has exceeded its prerecession peak level by nearly 20%, while the equal-weighted index has moved to within 5% of its previous peak.

However, general global economic uncertainty and higher interest rates have begun to put upward pressure on capitalization rates, weighing on price growth this year.

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Monthly CCRSI Results Data through February 2016

% Change1 Month Earlier1 Quarter Earlier1 Year EarlierTrough to Current
Value-Weighted U.S. Composite Index-0.6%0.6%8.3%89.6%
Equal-Weighted U.S. Composite Index- -0.8%-0.4%8.6%49.4%
U.S. Investment-Grade Index-0.7%-0.5%6.4%63.6%
U.S. General Commercial Index-0.8%- -0.4%9.3%48.4%

Source: CoStar Randyl Drummer March 31, 2016

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