National CRE News: Robust Leasing, Absorption Drive CRE Price Appreciation

Source: CoStar
Reporter: Randyl Drummer
Date Posted: July 15, 2015

Supported by record levels of absorption and strong leasing, commercial real estate prices rebounded in May, with continued strong recovery in both higher-end properties and accelerating investor interest in smaller, lower-priced assets, according to the latest CoStar Commercial Repeat Sale Indices (CCRSI).

The value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index gained 1.4% and 1.7%, respectively, in May, according to the data based on 1,258 repeat sales in May and more than 140,000 repeat sales since 1996.

The value-weighted index advanced 12.2% in the trailing 12 months through May and now stands 12% above its prior peak, reflecting the strong recovery of larger, higher-value properties. The equal-weighted index began its recovery later in the cycle but has increased at a faster rate of 14.1% in the trailing 12 months through May 2015 as smaller properties continued to gain favor with investors.


The momentum shift to lower-quality and smaller properties is also mirrored by the recent growth of the general commercial segment within CCRSI’s equal-weighted index. The General Commercial Index rose by the fastest rate among the four major CRE price indices, 14.6%, for the 12 months through May, while the Investment Grade Index increased 11.9%.

Robust leasing activity is driving price appreciation across more markets and property types. For the 12 months ended at mid-year 2015, net absorption in office, retail, and industrial properties totaled 575.5 million square feet — a 39.3% increase over the same period in 2014 and the highest annual total since 2008.

Net absorption in the general property segment rose 37% over the 12-month period through second-quarter 2015. Meanwhile, net absorption in the investment grade segment remained just as strong, increasing by nearly 40% over the 12 months as commercial tenants continued their flight to higher quality space.
See the full CCRSI July release and supporting materials.

In the office sector, for example, net absorption within 4- and 5-Star properties grew at nearly three times the rate of lesser properties rated 3-Star or lower during the same period.

Investment trading activity in the first five months was well above last year’s total, suggesting that 2015 could be another record year for acquisitions.

In fact, the U.S. composite pair volume of $115.7 billion for the 12 months ended May 2015 was the highest on record for the CCRSI, an indication that capital flows into real estate remain very strong. The percentage of trades defined as distressed continued to decline in May among both investment-grade and general CRE properties.

Link to Article: CRE Price Appreciation