Commercial real estate prices resumed an upward trend, liquidity indicators showed a stronger market for sellers and distressed sales fell to the lowest level in five years, according to the CoStar Commercial Repeat Sale Indices (CCRSI) for October.
The CCRSI reveals the following information:
Commercial real estate (CRE) prices rebound from an uneven third quarter to post solid gains.
Continued improvement in real estate fundamentals, along with a resolution to the government shutdown and the debt ceiling debate during the month, as well as increased clarity over the Fed's tapering policy, helped CRE prices stabilize in October.
The 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 1.1% and 1.4%, respectively, in October. Aggregate vacancy rates across the four major property types have nearly returned to their historical average levels, and with the exception of the multifamily sector, new construction remains low.
This solid improvement in market conditions has underpinned healthy growth in pricing for commercial property, despite recent volatility. On an annual basis, the equal weighted CCRSI Composite Index has risen 7.4% while the value-weighted Composite CCRSI Index has advanced by 9.5%.
Pricing has firmed at both the high and low ends of the market.
Within the equal-weighted U.S. Composite Index, the General Commercial segment – which includes lower-tier properties – achieved a monthly gain of 1.4% in October, and an annual increase of 7.1%, while its Investment Grade counterpart advanced by 0.8% during the same month but is up 9.8% from year-ago levels.
This broad increase in pricing across the quality spectrum is evident in the office sector in particular, where suburban properties posted a stronger 15% gain in pricing, compared with 8% pricing growth in central business district assets over the last year.
Liquidity indicators show marked improvement.
The year-to-date repeat sale transaction total for 2013 is up 16% from the same 10-month period in 2012. The General Commercial segment observed a 17% increase in total number of trades whereas the Investment Grade segment was up 11%, indicating that investor interest in commercial real estate is broadening.
Along with the increase in sales volume, other liquidity measures are pointing to a more accommodating market for sellers. The average time on market for for-sale properties fell 6% in October to 417 days from its most-recent cyclical peak of 443 days reached in 2012.
The bid-ask spread is moving in favor of sellers as well. At the low point in early 2012, sold price on average was only about 84.6% of the asking price, but since that time, it has improved to 88.4%. Meanwhile, the share of properties withdrawn from the market in October declined 1.3% from the prior year. These trends suggest buyers and sellers are finding common ground more quickly. While the market is not yet back to pre-recession levels in terms of liquidity, these indicators bode well for a continued recovery in pricing.
Distressed sales volume falls to lowest level since 2008.
The percentage of commercial property selling at distressed prices dropped to 10.7% in October from nearly 20% one year earlier – the lowest level since December 2008. Improving market conditions and rich pricing for core assets have given lenders confidence to move out on the risk spectrum to provide financing for buyers seeking to take advantage of lower pricing offered through distress properties.
Distressed levels vary widely by market, however. In housing bust markets including, Atlanta; Las Vegas; and Orlando, Fla., distressed deals still accounted for more than 20% of all sales activity in the third quarter of 2013, suggesting there is still significant room for price appreciation in those markets.
Conversely, in healthier markets such as San Francisco, Boston, Los Angeles, Seattle and New York, the share of distressed sales fell into the single digits in the third quarter of 2013.
For accompanying charts on the CCRSI, click here.