CoStar’s Commercial Repeat-Sale Indices (CCRSI) indicate prices are heating up for lower-grade assets. CoStar’s General Commercial Index, which comprises lower-tier properties, has risen 12 percent year to date through July 31, compared with a 5.7 percent rise in CoStar’s Investment Grade Index, which mainly represents high-end properties.
Investors had originally flocked to the best properties after the real estate downturn, looking for relative safety. But with prices of high-quality properties up 45 percent from their trough in January 2010—versus a 16 percent rise from the bottom for general commercial properties since March 2011—buyers are taking on more risk as the economy improves, noted Ruijue Peng, chief research officer for CoStar Group’s property and portfolio research analysis and forecasting group.
“Investors are looking for better yield,” Peng said. “They are more comfortable reaching into the secondary markets, such as class-C, small buildings.”
Pricing gains in CCRSI’s equal-weighted index, which is primarily made up of smaller transactions, had risen 13.6 percent for the 12 months ended July 31, compared with a 9 percent gain for the value-weighted index—a measure that represents larger, higher-quality properties.
Those may be robust numbers, but a more recent time frame shows a deceleration among the higher-end group. The equal-weighted index climbed an average of 2.1 percent in July, while the value-weighted index was up 0.1 percent for the month.
“This slowdown in pricing gains likely reflects that pricing for core assets in primary markets—particularly five-star office properties, class-A apartments and well-leased malls—has already reached its prior peak,” Peng said.
CCRSI data also suggest that liquidity is improving. The average time on the market for assets up for sale fell to roughly 418 days by July, down from 443 days 12 months earlier. Average sales prices of properties rose to 88 percent of the asking price, up from 85.5 percent 12 months before.
“It’s still high, but it’s getting better,” Peng said in regard to the average time on the market.
Lower withdrawal rates also are a good sign, according to Peng. About 41 percent of all listings were withdrawn in July, down from 45 percent a year earlier.
Overall, property sectors such as office and industrial could still be in store for even more asset value appreciation. “There is more room” for higher prices, Peng said.