Market Updates

Commercial Real Estate Prices Continue Positive Momentum

Prices for U.S. commercial property continued to rebound from their post-recession lows as investors hunt for higher returns and take advantage of more favorable liquidity conditions to expand their property holdings across more secondary markets and asset classes.

According to the latest CoStar Commercial Repeat Sale Indices (CCRSI) released this week, pricing trends maintained their positive trajectory based on commercial property sales through July 2013 with the two broadest measures of aggregate pricing for commercial properties within the CCRSI index, the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index, both increasing over the previous month.

Up until this year, pricing gains in the value-weighted index, which represents larger, higher-quality commercial properties, have posted the strongest pricing gains as investors bid-up prices for five-star office properties, Class A apartments and well-leased malls in primary markets.

Over the last few months, however, this segment of the market has lost some momentum as many investors, feeling priced out by competition for the highest quality properties in core markets and disappointed by low bond yields, looked for higher returns across a wider range of markets and property asset classes. Monthly gains in the value-weighted index have averaged nearly 1% over the last three months, and in July 2013 the index rose just 0.1%, reflecting the fact that pricing for such core assets has already reached its prior peak.

Meanwhile, pricing gains in the equal-weighted index, which is dominated by smaller transactions, has continued to accelerate. The equal-weighted index has risen by an average of 2.7% per month from May – July 2013, indicating that investors are more willing to buy more diverse types of properties in more markets. The fact that investors are seeking out property previously considered too risky reflects their increasing confidence in a strengthening recovery.

The appeal of secondary markets and property types was also apparent in a comparison of CCRSI’s general commercial and investment-grade property indices. The General Commercial index, which includes lower-tier properties, has achieved the strongest monthly and quarterly gain of all the major CCRSI indices. Year-to-date, the General Commercial Index has advanced by 11.9%, while pricing gains in its Investment Grade counterpart advanced by 5.7%.

Searching for Yield In a Lot of New Places

One recent example of this trend can be seen in Capstone Development’s purchase last month of the Residence Inn Birmingham Downtown at UAB. The private equity investor based in Washington, D.C. made its first acquisition in Alabama in a joint venture with an undisclosed U.S. pension fund advisor.

Daniel C. Peek, senior managing director and head of hotel sales for HFF HFF’s Hotel Group, who marketed the 129-suite extended-stay hotel in downtown Birmingham on behalf of an affiliate of Fremont Realty Capital, said he has noticed a big uptick in the number of well-capitalized institutional investors seeking opportunities in both primary and secondary markets.

“As the cycle matures and competition increases, we are seeing savvy investors expand their interest to the top 50 or so U.S. markets, which includes secondary and tertiary destinations, whereas 12 to 18 months ago, most investors were only considering opportunities in the top 10 or 12 markets,” said Peek.

A More Accommodating Market for CRE Sales

Not only are investors buying more commercial property — transaction volume over the three-month period from May – July 2013 is up 20% from the same period a year ago — other liquidity measures point to a more accommodating market for real estate transactions.

Average time on market among for-sale properties dropped 5.4% in July from its cyclical peak one year ago. Also, the gap between initial asking and final sales price narrowing by 3.5 percentage points as of July 2013, reflecting increasing consensus on property values between buyers and sellers.

“While we are not yet back to pre-recession levels in terms of liquidity, the improvement seen in these indicators bodes well for a sustained recovery in pricing,” noted Dr. Ruijue Peng, chief research officer for CoStar’s Property and Portfolio Research division.

Source: CoStar Tim Trainor, September 18th, 2013
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