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Properties Previously Bought at Peak Exerting Downward Pressure on Current Prices

CoStar Commercial Repeat-Sale Indices, May 2011 Release

The commercial real estate market is continuing to adjust from “bubble” prices as 70.2% of the acquisitions made from 2005-2007 and subsequently sold in the first quarter of 2011 sold at a lower price, according to the latest release of CoStar’s Commercial Repeat Sales Indices (CCRSI).

Comparatively, 40.5% of acquisitions made before 2005 and subsequently sold in the first quarter of 2011 sold at a lower price. 55% of the first quarter 2011 sales pairs were for properties previously purchased in 2005 or after.

“What we have been able to do is to quantify the subsequent pricing performance of the ‘bubble’ era acquisitions,” noted CoStar Senior Real Estate Strategist Chris Macke. “This is critical information, as many of the ‘extend and pretend’ loans are secured by these bubble-era properties.”

The newly released Commercial Repeat-Sale Indices (CCRSI) May 2011 report is based on data through the end of March 2011.

CoStar’s Investment Grade Repeat-Sale Index was down 10.5% for the first quarter following an 8.4% increase in the fourth quarter. This continues the see-saw pricing pattern observed with oscillating quarterly sales data and returns the Investment Grade Index within 2% of its market low in the fourth quarter of 2009. From its peak in the second quarter of 2007 the Investment Grade pricing index has declined 39%.

CoStar’s General Grade Repeat Sales Index declined by 1% in the first quarter after a 5.7% decline in the fourth quarter. The General Grade Index reached a new low in the first quarter and is down 33% from its market peak in the third quarter of 2007.

The weak performance of the Investment Grade index during the first quarter along with the continued weakness in the General Grade Index collectively led to a 2.8% decline in the U.S. National Composite Index, which is an equal-weighted repeat sales analysis of all commercial real estate sales, with two-thirds of the transaction count contained within the General Grade Index.

Northeast Strengthening

Among the CCRSI’s regional prices indices, the Northeast region of the United States continues to lead the nation in terms of strengthening prices having recovered 29% of its pre-recession pricing levels.

However, the Midwest posted the strongest quarterly gain of 3.2%. The Midwest now replaces the Southeast as the only other region to join the Northeast as having gained back any of its pre-recession pricing levels.

Overall, pricing for commercial real estate in the Northeast remains 15% lower than its pre-recession pricing levels. The West, Midwest and Southeast regions remain down 38%, 37% and 35% respectively.

The Northeast region of the United States benefits from the impact of commercial property sales in New York City and Boston, two desirable core markets that have continued to attract investor interest, and have generally stronger economic conditions and superior multifamily pricing performance.

Retail Rebounds

Retail was the only property type that did not experience a pricing decline during the first quarter of 2011. Retail posted a 1.6% gain while office declined 11.7%, industrial declined 5.1% and multifamily declined 3.1%.

By property type the highest percent of distress in the first quarter was in hospitality at 42.6%, followed by office at 35%, retail at 30%, industrial at 28.4% and multifamily at 25.4%.

The CoStar Commercial Repeat-Sale Indices (CCRSI) are the most comprehensive and accurate measures of commercial real estate prices in the United States. In addition to the national composite index, there are a total of 32 sub-indices in the CoStar index family. The sub-indices include breakdowns by property sector (office, industrial, retail, multifamily and land), by region of the country (Northeast, South, Midwest, West), by transaction size and quality (general commercial, investment grade), and by market size (composite index of the 10 largest metropolitan areas in the country). The CoStar national composite index is produced on a monthly basis.

Reprint from CoStar Research      By Mark Heschmeyer

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