Absorption of Lower-End Commercial Properties Rises 61% Over 12 Months Ended First-Quarter 2015
Reporter: Randyl Drummer
Date Posted: April 15, 2015
Continuing the broad recovery across all property types and throughout most U.S. markets, commercial real estate prices again moved upward in February, reflecting solid occupier demand as well as widening investor interest in smaller properties outside the largest U.S. metros.
The latest CoStar Commercial Repeat Sale Indices (CCRSI) shows that the two broadest measures of U.S. commercial property pricing, the value-weighted and the equal-weighted U.S. Composite Indices, gained 1.5% and 1.4%, respectively, in February. That’s a continuation of January’s strong performance, and both of these key indices have increased by more than 13% over the past 12 months as final sale pricing increases expand into smaller markets and secondary property types.
The equal-weighted composite index, reflecting rising momentum in transactions for smaller properties at the lower end of the market, in February has now recovered within 12% of its pre-recession high — its highest average since the fourth quarter of 2008 — with investors parking their capital in alternative locations as prices escalate in the most desirable core markets. The index has now recovered by 37.4% above its 2011 trough.
The momentum shift to lesser-quality and smaller properties has also turned up in recent growth in the General Commercial Index property segment, which has increased by 13.4% over the 12 months. Its higher-end counterpart, the Investment Grade Index, rose by 9.3%.
The value-weighted U.S. Composite Index — more heavily influenced by the high-value trades in the best primary markets that led the recovery — surpassed its previous 2008 peak by more than 8.8% in February.
Continuing what has become an seasonal slowing trend in recent years, net absorption of office, retail and industrial space slowed in first-quarter 2015 from its pace during the last three quarters of 2014. However, net absorption still totaled 527.2 million square feet for the 12 months ended March 30 — a very strong 39.6% above the previous 12-month period that ended in March of last year.
In more evidence of broad recovery, net absorption of general commercial properties rose a whopping 61% over the 12-month period, compared with a 31.4% gain in the investment grade segment. That’s a switch from earlier in the recovery, when high-end assets led absorption trends as tenants chased lower rents to move into prime space.
Leasing momentum is shifting toward low-end properties as vacancies have fallen and rents have escalated at the top end of the market, however.
For example, vacant office space in the 4 and 5 Star property segment dipped below its 15-year average of 12% in 2014, helping accelerate absorption and rent growth for 3-Star properties for the 12 months through first-quarter 2015.
Investment sales activity in the first three months of 2015 followed the typical pattern, falls from the previous year-end level. Despite the slowdown from the fourth quarter of 2014, however, trading activity through the end of February suggests another active year for CRE acquisitions in 2015.
The U.S. composite sales pair count of 2,357 and sales volume of $18.9 billion in the first two months of 2015 exceeded totals from the same period in 2014, while the share of properties selling at distressed prices fell from 32% in 2011 to less than 10% for the 12 months ended February 2015.
Link to article: CRE Rising Prices