By Mark Heschmeyer
February 11, 2015
8
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Price Growth,
It Was a Very Good Year
Broad Pricing Gains Registered Across Property Types, Regions in Tandem with Improving Fundamentals
Investors both large and small remained intently focused on commercial real estate last year, as pricing levels rose in tandem with occupancies, vacancies remained near cyclical lows, and rent growth posted healthy gains across property sectors and regions.
Those were among the findings in the February 2015 CoStar Commercial Repeat Sale Indices (CCRSI), which analyzed commercial property sales through December 2014, providing one of the broadest measures of commercial real estate repeat sales activity.
The value-weighted U.S. composite index in the CCRSI increased 11% in 2014 to 5.7% above the previous peak in 2007, as investors continued to pour money into commercial property.
While investor demand for core assets remains high, the CCRSI also reflected the trend among investors increasingly moving to secondary markets in quest of higher yields. The equal-weighted U.S. composite index, in which each sale transaction is weighted the same regardless of sale price, increased 13.3% in 2014. This index, which more readily reflects the influence of smaller transactions and those in secondary markets, is still 14% below its prior peak, suggesting that there is more room for price appreciation as the cycle matures.
Capital Markets Are Highly Liquid
In a repeat of the seasonal sales pattern seen over the last several years, transaction activity spiked in the final month of the year as investors rushed to close deals prior to year-end. Commercial property sales in December 2014 helped lift the total number of repeat sales in 2014 to a record high of more than 16,000, an increase of 7.3% from the 2013 total.
The low cost of debt throughout the year also contributed to the record deal volume, while low interest rates have kept spreads over the risk-free rate wide, despite historically low cap rate levels.
Pricing Gains Seen Across Property Types and Regions
This month's release included the quarterly property type and regional indices. The CCRSI Multifamily Index had already reached its prerecession peak earlier in 2014. During 2014, the Multifamily Index moved up another 11.7% and is now 3.5% above its 2007-high. The other major commercial property type indices also saw strong growth in 2014, although they are all still more than 10% below previous peak levels. Pricing grew 13.9% in the Retail Index in 2014, 11.9% in the Industrial Index, and 9.5% in the Office Index.
Among the CCRSI regional indices, the South Index led the nation in terms of price appreciation in 2014, with price growth of 15.1%.
Closer Look at Property Type Pricing Trends
OFFICE: Pricing in the Office Index increased 9.5% in 2014. Overall office market fundamentals improved significantly in 2014 as office vacancy decreased to 11.3%, from 11.9% in 2013. Despite a moderate pickup in development, net absorption grew even more strongly, up 40% from 2013 levels, suggesting diminishing headwinds from both shadow supply from the last recession and the trend among employers to reduce office space per employee.
MULTIFAMILY: Having reached its prerecession peak in the second half of 2014, multifamily pricing continued to expand, growing 11.7% in 2014. The Multifamily Index was the first property segment to begin its recovery, driven by a greater availability of debt financing and investor demand for well-leased assets in core coastal markets. However, most apartment markets are now in the expansionary phase of the cycle, where construction will begin to exert pressure on occupancies and rent growth.