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Wednesday, October 06, 2010

CoStar: Commercial Real Estate Prices decline in August

by Calculated Risk on 10/06/2010 11:35:00 AM

This is the new repeat sales index for commercial real estate. Previously I've only been using the Moodys/REAL Commercial Property Price Index (CPPI) for commercial real estate.

From CoStar: CoStar Commercial Repeat-Sale Indices

  • General commercial real estate and the broad-based CoStar composite index for all commercial real estate reversed the positive trend reported in last month’s findings and came in at -3.48% and -1.38% respectively for the month of August. ...

  • Repeat sales values for investment grade commercial property reversed their negative trend from July and moved positive again with a 3.73% climb in August. We continue to see a significant spread in cap rates and prices from the larger property in prime core markets to the property in second- and third-tier broader markets. Even with tighter financing, there appears to be plenty of institutional and REIT capital oriented to the lower-risk core markets.

  • For the past three months, all three indices are negative at -3.92% for the broad general index, -3.24% for investment grade and -3.92% for the composite. For the past 12 months, all three indices are down approximately 10% to 11%.

  • One reason for the volatility of these indices discussed here is the proportion of distress sales, which are continuing to climb in absolute levels, although as a percentage of sales they have leveled since June. This volume of distressed sales, while certainly not a tsunami, is still significant especially among lodging and multifamily properties.
    emphasis added
  • CoStar CRE Price Index Click on graph for larger image in new window.

    This graph from CoStar shows the indexes for investment grade, general commercial and a composite index. The investment grade index had been increasing since the beginning of the year, but the overall index is still declining.

    It is important to remember that there are very few CRE transactions (compared to residential), and that there is a high percentage of distressed sales.

    On the number of transactions:
    The CCRSI September report is based on sales data through the end of August. In August, 559 sales pairs were recorded.
    Distress continues to be a significant factor in the index results. Since 2007, the ratio of distressed sales to overall sales has increased from approximately 1% to approximately 23% currently. Discounts on distressed property sales (REOs and short sales) compared to non-distressed sales are running an average of 40% for multifamily, 20% for office and industrial and 17% for retail property based on 2010 data to date.