CRE Price Recovery Continues Despite Seasonal Volatility
Recovery Deepens, With Secondary Markets Outperforming Core And Other Property Types Joining The Mix
By Randyl Drummer
The U.S. Composite Index ended the first quarter 4.3% above the same period in 2011, although prices are still 34.5% lower than the peak levels in 2007. The U.S. General Commercial Index, made up of smaller and lower-grade properties, continued its upward trend in the first quarter and gained 3.7% since bottoming a year ago. Unlike the volatility seen in the Investment Grade Index, the General Commercial Index has reflected a slow but steady recovery.
In each of the past three years, the Investment Grade Index has experienced a significant seasonal first-quarter pricing decline following a proportionate pricing increase in the fourth quarter of the previous year. These year-end price spikes have been consistent with higher transaction volume as investors rush to close deals prior to Jan. 1. The first-quarter declines have coincided with a return to normal trading activity, while macroeconomic shocks in 2010, 2011 and 2012 have also contributed to the recent “spring slumps” in pricing.
CoStar analysts say this volatility is a normal and expected occurrence and should not be interpreted as a regression in real estate prices. The Investment Grade Index remains 8.2% above year-ago levels, despite the most recent declines.
An active March capped off a busy quarter in the investment markets, with composite pair volume in the first quarter totaling $12.3 billion — much lower, as expected, than the fourth quarter of 2011’s total, but 38.7% above the first quarter of 2011’s total. Reflecting ongoing improvement in investor sentiment, both the investment grade and general commercial segments traded heavily in March, with total investment volume in each exceeding their two-year monthly averages by wide margins.
As a percentage of total property sales volume, distress has been generally declining over the past 12 months. In March, only 23.5% of observed trades were distressed, notably lower than the 28.6% observed over the past three years. Although distressed property sales is expected to remain elevated for several more years, rising rents and occupancies should hold down overall levels of distress.
Office Pricing Shows Strongest Gains
With the exception of hospitality, the seasonal first-quarter pricing slump was observed across all property types. Despite a pricing reversal in the first quarter, the multifamily sector continues to lead the recovery in terms of timing and magnitude. Apartment property prices have recovered to 2003 levels since reaching the bottom in the second quarter of 2010 but are still 28.2% lower than the peak in 2007. Meanwhile, the sector has had the strongest rent recovery to date, prompting investors to bid up pricing in anticipation of future income gains.
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