CRE Price Growth Rebounds Along with Investor Confidence at Midyear, While Rate of Increase Slows

Investor confidence returned following a tepid first quarter and the CoStar Commercial Repeat-Sale Indices (CCRSI) ended the first half of 2016 on a stronger note, reflecting the broad-based gains in commercial real estate prices and investment activity across regions and property types.

The value-weighed U.S. Composite Index, which largely reflects sales of high-quality, higher priced assets, rose by 3.3% in the second quarter, while the equal-weighted U.S. Composite Index, which reflects the larger number of sales involving smaller properties, rose 2.1%. That compares with just 0.4% and 0.1% growth by the two indices, respectively, in the first quarter.

CRE Prices Continue to Go Up, but at Slower Rate

While price growth for commercial property resumed, the annualized rate of increase dropped into the single digits for the price indices during June, 9% for the value-weighted index and 6.8% for the equal-weighted index. The decline suggests that price growth may continue to plateau in 2016 as the current cycle enters its later stages.

As expected, investment sales volume declined from last year’s blistering pace. Total volume of paired property sales was $57.7 billion in the first half of 2016, down 5.4% from the same period a year earlier. The U.S. property markets, however, received a boost from favorable market conditions in the U.S. and deteriorating geo-political conditions abroad such as Britain’s Brexit vote to withdraw from the European Community.

Price Growth by Property Type

The CCRSI’s Office, Industrial and Retail price indices all increased by a uniform but steady 1.9% in the second quarter, followed closely by the U.S. Multifamily Index, which increased by 1.8%. The Hospitality Index, which logged the largest peak-to-trough decline during the Great Recession, posted the strongest growth among property types during the second quarter, advancing by 4.5% to reach within 1% of its prior peak level.
The Prime Market Index, comprised of the large core coastal metros within each major property type, have generally increased more rapidly than the overall indices for the individual property types.

Price Growth Varies by Region

While all four U.S. regional indices showed healthy growth in the second quarter of 2016, the West posted the strongest gain, becoming the second regional U.S. composite index to advance beyond its pre-recession peak, following the Northeast Composite Index, which rose 1.8% in the second quarter and 8.2% for the 12-month period ending in June 2016.

The South Composite Index increased 1.8% in the second quarter and 7.3% over the year. Similar to pricing trends in the West region, the South Multifamily Index led growth in the South region, rising 8.6% in the 12-month period ending in June.

After declining by nearly 1% in the first quarter, the Midwest Composite Index bounced back in the second quarter of 2016, growing by 2.3% to post the strongest quarterly growth rate of the four major regions, although it remains below its previous cyclical peak level, as property price growth in the Midwest region still lag other regions.