CoStar: CRE Prices Rise Steadily

Commercial real estate property prices continue to climb, led by office and apartment properties, reported CoStar, Washington, D.C.

CoStar’s value-weighted price index, which reflects sales of high-quality assets in core markets, rose 2.1 percent while the firm’s equal-weighted index, which weighs each sale transaction equally to capture more numerous small deals, increased 2.4 percent in the second quarter. 

Hans Nordby, managing director with CoStar Portfolio Strategy, Boston, said northeast region price growth led other parts of the country. “The growth in the northeast versus other regions stood out,” he said. “The northeast includes some premier global metros, so it’s important not just to domestic investors but also to sovereign wealth funds and to flight capital from places like China.” 

Strong investor demand pushed CoStar’s Northeast Composite Index up 14.9 percent in the 12 months ending in June, Nordby said. Three of the four property types within the northeast region–multifamily, retail and industrial–now surpass their prior peak. 

“In addition, New York has the longest weighted-average office lease term of any market,” Nordby said. “That correlates nicely to why many institutions and sovereign wealth funds and wealthy individuals are buying CRE there. They’re buying a bond substitute and they want it with some duration. They want quality.” 

Offices gained momentum nationally, increasing 11.9 percent nationally during the quarter, CoStar reported. The retail and industrial sectors advanced more slowly over the last year but moved to within five percent and nine percent of their previous peaks, respectively, in the second quarter. 

The multifamily index advanced 2.9 percent in the second quarter, contributing to annual gains of 14.1 percent in the 12-month period ending in June, the strongest annual rate of the four major property types. Multifamily regained its pre-recession peak in the second half of 2014, well before any other property type, and as of June it stood 12 percent above its 2007 high.

“Multifamily has the shortest lease term, but it also has the lowest average vacancy rates,” Nordby said. “The investor is not taking a lot of discrete lease risk because an apartment property has lots of little leases, so occupancy stays high. Plus financing is cheap and abundant; the agencies continue to lend and an increasing assortment of lenders will let borrowers add on mezzanine financing, like we saw in 2006. Though not as typical as in 2006, it’s becoming more than it was.”

After suffering the biggest peak-to-trough decline of any of the property types in the last recession, the hospitality sector’s index surged upward 15.4 percent over the last year to more than 53 percent above its recessionary trough. Hotel occupancies recently reached their highest level since the mid-1990s, leading to room rate and revenue per available room growth as well as increased investor demand for hotel properties, CoStar said.

First-half volume increased 43.7 percent compared with the first half of 2014 to $58.8 billion, suggesting that capital flows into property investment will remain strong this year, CoStar said. At the same time the share of distressed properties trading declined to 6.6 percent in the first half of the year, down from a recessionary peak of nearly 33 percent.