Commercial Real Estate Prices Remain On Upward Trajectory

Commercial property prices shrugged off a seasonal slowdown in trading activity, while there were improvements in both lending, liquidity and distressed sales, according to CoStar's Commercial Repeat Sale Indices (CCRSI) for January.

In a pattern repeated over the last several years, the number of repeat property sales in January fell from the previous several months, as trading activity predictably returned to a more normal level following the frenzied pace at year-end, CoStar reports.

CoStar notes that this slowdown in investment activity has typically accompanied a pricing decline in the first quarter. And while the CCRSI Value-Weighted U.S. Composite Index slipped by a slight 0.6% in January, reflecting the slowdown in sales activity among larger properties, the Equal-Weighted U.S. Composite Index – which is more heavily influenced by smaller transactions – remained on an upward trajectory, increasing by 1.0% in January, according to the report.

Price Gains
Bolstered by strong investor interest throughout the recovery for core markets and multifamily property, the equal-weighed U.S. Investment Grade Index has led pricing gains, advancing more than 33% from the market trough in 2009. By comparison, the equal-weighted U.S. General Commercial Index did not turn positive until 2011.

The recovery in fundamentals has now broadened across the size and quality spectrum in many markets, which is reflected in the consistent pricing gains in both indices over the last year. The equal-weighted U.S. Investment Grade Index climbed 17.5%, and the equal-weighted U.S. General Commercial Index rose 10.9% for the 12 months ending in January.

Expanded Lending
According to a separate report issued by the Mortgage Bankers Association (MBA), the Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations, mortgage originations for commercial/multifamily property increased a hefty 16% in the fourth quarter of 2013 from the same period one year earlier.

The MBA survey also indicated increased interest among lenders in secondary property types and markets. Originations for retail and office properties were up sharply, while multifamily originations were flat in the fourth quarter of 2013 versus a year earlier.

Distress Sales
Despite the slowdown in January, the number of observed trades over the prior 12 months increased by 14.3% over the 12-month period before that. Importantly for the pricing indices, the number of distressed sales has declined by 21.8% over that same period. As of January, the percentage of total observed pair counts classified as distress sales fell below 10%, down sharply from a peak of 35% in October 2010.

Rising occupancies have helped stabilize net operating incomes across a growing number of markets, leading to a large net reduction in the number of forced sales. This trend has been a positive force for commercial real estate pricing, CoStar notes.

Buyers And Sellers
The number of days on market for commercial property has consistently declined over the last year, falling from 432 days in January 2013 to about 417 days in January of this year. Also consistent with the positive pricing trends, the gap between asking and actual sale prices closed by more than one percentage point over the same period.

However, while these indicators show improvement, buyers and sellers still remain far apart relative to historic averages, suggesting that there is further room for liquidity to increase in 2014.

The number of properties withdrawn from the sales market by discouraged sellers is leveling off. In January 2014, the rate at which properties were withdrawn from the market declined 3.1% from the same period last year.

CoStar's entire CCRSI can be found here.


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