Commercial Real Estate Prices Steadily Climb; Absorption Rate Kicks Into High Gear

Posted by Patrick Barnard on January 16, 2014 No Comments
Categories : Commercial Mortgage

Commercial property prices continued to show steady gains for November 2013, while the pace of absorption was the highest since 2007, as revealed in CoStar's Commercial Repeat Sales Indices (CCRSI), based on 1,014 repeat sales for the month.

First, CoStar reports that commercial property prices continued their steady upward trajectory, with the U.S. economy on more solid footing during the fourth quarter of 2013 – and with demand for commercial real estate space on the rise.

Two broadest measures of aggregate pricing for commercial properties within the CCRSI – the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index – advanced by 0.8% and 1.1%, respectively, in November 2013 and rose by a more robust 10.9% and 7.8%, respectively, over the last year, according to the report.

CoStar also reports that recent pricing performance has been steadier at the high end of the market. The U.S. Value-Weighted Composite Index, which weights each repeat-sale by transaction size or value (and therefore, is heavily influenced by larger transactions), has increased by a cumulative 51.9% since the start of 2010, reflecting steady demand for institutional-grade property assets in top-tier metro areas that led the recovery, according to the company.

Recent performance in the U.S. Equal-Weighted Composite Index, which weights each repeat-sale equally and is more heavily influenced by smaller transactions, has been more volatile, says CoStar.

The Index lost ground in the third quarter of 2013, as the company reports the Index was significantly more impacted by uncertainty concerning the economy and interest rates, but it has since rebounded. The Equal-Weighted Index has increased 18.4% from its trough in 2011.

The company's report also shows that absorption expanded at the fastest rate seen since 2007. Tenants occupied an additional 380 million square feet of office, retail and industrial space throughout the U.S. in 2013 – the largest annual gain in net absorption over the past six years, CoStar notes.

The Investment Grade segment of the market continued to dominate in space absorption; however, CoStar says the pace of absorption in the General Commercial segment has improved significantly as the recovery is accelerating in the secondary and tertiary markets. The General Commercial segment's share of total net absorption increased from being less than 30% for the last several years to 32% in 2013.Â

Finally, CoStar says that distress sales remained low. The percentage of commercial property selling at distressed prices was slightly more than 13% in November 2013 – down roughly two-thirds from the peak in 2011. Technology and energy-driven markets including Houston, Dallas and Austin in Texas, as well as Denver, have experienced some of the strongest declines in the share of distress property sales activity over the last year, with a reduction of 80% or more, according to the report.

The complete report, with accompanying graphs and charts, can be found here.

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