Latest Repeat Sales Analysis Finds CRE Pricing Holding to SeeSaw Pattern

Posted on February 24, 2011

CoStar’s Investment Grade Repeat-Sale Index (CCRSI) increased nearly 7% nationally for the month of December, continuing the recent up-and-down seesaw pattern observed in monthly pricing data for commercial property.

While the commercial real estate pricing index is still below levels from two years ago by 20%, the investment grade property index finished 2010 with a positive increase of 8% for the year. From its peak in July 2007, the Investment Grade pricing index is down 34.1%, with the trough occurring in January 2010 when the Index was down 40%.

But while investment-grade “trophy” buildings are commanding higher prices, prices for the majority of “ordinary” office property, shopping centers and warehouse buildings continue to search for a bottom. The General Grade pricing index slipped just under 1% for the month of December and lost 8.2% for the fourth quarter of 2010.

The strong performance of the Investment Grade index was enough to lift the U.S. national Composite Index, which is an equal-weighted repeat sales analysis of all commercial real estate sales, with two thirds of the transaction count contained within the General Index. The Composite Index was up 1.8% for the month of December, down 5.8% for the fourth quarter and down 6.3% for the full year. Overall the Composite Index is down 22% over the past two years.

“Pricing at the city level is starting to reflect the improving market fundamentals that have been occurring in markets such as Washington, DC and New York,” said Chris Macke, senior real estate strategist for CoStar. “We continue to see significant variations in pricing performance based on market and property variation.”

All Property Types Showed Quarterly Declines

For the full quarter ending in December 2010, the CoStar Commercial Repeat Sales Index declined across all property types when analyzing pricing trends using the composite index that includes all property sizes. Industrial and retail property posted the largest quarterly declines, down nearly 10%. Pricing for office property also is down 7% and multifamily off nearly 2%. Multifamily was the only composite index that was up for the year with a 3% gain in pricing.

When analyzed separately by general and investment grade indices, the CoStar Commercial Repeat Sales Index reveals higher priced quality properties moving strongly in a positive direction.

The average deal size within the Investment Grade index was nearly $16 million in December compared to $11.1 million in November and $11.8 million in October. The average deal size for the general index was $1.6 million in December.

By total transaction count the General Sales index accounted for 70% of the total sales in November and 66% in December. By volume in December the Investment Grade properties represented 85% of total volume.

Northeast Leads U.S. Regions in CRE Price Recovery

Delving further into pricing trends for commercial real estate, the Northeast region of the United States leads the nation in terms of strengthening pricing, having recovered 23% of its pre-recession pricing levels. This region benefits from the impact of commercial property sales in New York City and Boston, two desirable core markets that have continued to attract investor interest, generally stronger economic conditions and superior multifamily pricing performance.

The Southeast is the only other region of the country where commercial real estate has recovered a portion of it pre-recession pricing levels gaining back 14%.

The West, Midwest and Southeast regions remain down 38%, 39% and 28% respectively.

In the West region, pricing for all commercial property types are down in recent quarters except for retail, which has begun to stabilize. In the South, multifamily pricing is up significantly but pricing for other property types have fallen. In the Midwest all property types are down, especially office. In the Northeast, average pricing for multifamily is up strongly with Industrial and Office pricing stabilizing.

Washington, DC, Leads Largest Markets in Recovery

By property type, pricing for commercial property sales in the top 10 largest markets is recovering much stronger than the general market with the exception of retail.

Washington, DC, continued its frontrunner status among major U.S. markets in leading the commercial real estate pricing recovery, ending 2010 with a 5% increase in the fourth quarter of 2010. Commercial property pricing in the Washington, DC, market gained 15% for the full year of 2010 and has gained 19% since its market low.

After three consecutive quarters of pricing increases, commercial property pricing in New York registered a 2% decline in the fourth quarter of 2010. New York commercial property pricing has increased 6% above its market low.

Chicago, San Francisco and Atlanta all experienced declines in pricing as the commercial property values in those markets continue to search for a pricing bottom. Los Angeles had its first pricing increase in the fourth quarter, albeit 1%, the first increase in that market since the first quarter of 2008.

Distress Sales Have Not Peaked Yet

Distress sales as a percent of the total has been increasing in each of the four quarters in 2010 with just over 20% in the 4th quarter with 18.5% for all of 2010. By property type the highest percent of distress in the fourth quarter were for hospitality at 36%, followed by multifamily at 24%, office at 21% and industrial and retail both near 19%.

The CCRSI February 2011 report is based on data through the end of December, 2010. The indices are constructed using a repeat sales methodology. Widely considered as the most accurate way to measure price changes for real estate, a repeat sales methodology measures the movement in the prices of commercial properties by collecting data on the actual sales prices that occur when a property sells. When a property is sold more than one time, a sale pair is created. The prices from the first and second sale are then used to calculate price movement for the property. By aggregating all the price changes from all of the sale pairs, a price index is created.

In December of 2010 983 pair sales were recorded compared to 656 in the prior month, 610 in October and 690 in September. It is typical to see volume increase at year-end. In December of 2009 the pair sales count was 807, so volume on this basis is up 22% from a year earlier.

By Mark Heschmeyer, Costar Group