Q2 Results Show Broad Gains in Pricing

WASHINGTON, DC—Although sales of large, core-like assets have pushed commercial property pricing back to pre-recession levels last seen in 2007 in some markets, investors have also been going farther out on a limb with regard to risk. Those are two of the key takeaways from this month's CoStar Commercial Repeat Sale Indices, which found a 9.7% year-over-year increase in the US Composite Index. On a value-weighted basis, the US composite is up 59% over the trough.

CoStar Group notes that broad gains across all of the property sectors over the 12 months ended June 30 demonstrate “the extent of the recovery in commercial real estate prices.” Drilling down, the firm notes that pricing in the overall market has increased more rapidly than in the CCRSIs for prime markets over the past year.

As an illustration, the broader Office Index gained 7% for the preceding 12 months, while the Prime Office Metros Index advanced by 2.7% in the same time period. “This can be seen as a sign that higher prices may be pushing investors out of primary markets as strengthening market fundamentals provide increased confidence to invest in more non-prime markets,” according to CoStar.

And while a rising tide may lift all boats, it doesn't lift all of them at the same velocity. Average office sales prices are above the 2006 and '07 averages in New York City, San Francisco, Houston and Denver, CoStar says, while some of the largest discounts from peak office pricing are still available in Portland, Orange County, Phoenix and the East Bay. 

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The greatest price gains over the past 12 months have been posted in the industrial sector, with CoStar's Industrial Index registering an annual gain of 11.5%. It reflects improvements in market fundamentals as vacancy rates sunk to a cyclical low in the second quarter of this year. Pricing in the Prime Industrial Markets Index gained more slowly, advancing 6.9% for the trailing 12-month period as investors acquired assets across the size and quality spectrum.

However, the CCRSI Retail Index ran a close second to industrial, increasing by 10.5% over the past 12 months in line with improving market fundamentals. All retail property subtypes saw vacancy compression over the last several quarters, even previously struggling neighborhood and strip centers, according to CoStar.

And the closest thing to peak pricing overall was seen in multifamily during June, with the 10.3% annual gains pushing CoStar's Multifamily Index to within 4% of its prerecession peak. Meanwhile, the Prime Multifamily Metros Index has already surpassed its previous high-water mark in '07.

However, CoStar notes that in the apartment sector, “Supply is now flowing quickly in many markets as construction levels increase, which will cause vacancies to increase from cyclical lows. In an environment of softening fundamentals and pricing that is at or above peak levels, signs of a deceleration in pricing appeared in recent quarters. The Prime Multifamily Metros Index has grown 7.1% in the last 12 months, compared with average gains of 16.6% in the prior two annual periods.”

As for the lodging sector, CoStar notes that as occupancy gains have leveled off over the past couple of years following a sharp post-recession bounce back, so too has price growth. After posting double-digit gains in 2012, the Hotel Index increased by 4.6% for the year ending in June 2014. While the Hotel Index has increased 24.1% from its 2009 trough, it remains 33% below the peak.