Top-Heavy Recovery

Source: CoStar Group Inc.


The recovery in commercial real estate prices continued to gain momentum in 2012. According to the CoStar Commercial Repeat Sale Indices, commercial real estate transaction volume reached a high of nearly $64 billion in 2012. These indices, which are based on more than 100,000 repeat sales since 1996, show a 22 percent jump in dollar volume from 2011 and the highest annual total since 2004. The chart below shows that pricing has continued to make strong gains, as well.

While pricing gains have been observed across the real estate spectrum, the difference in the two broadest measures of pricing — the value-weighted and equal-weighted U.S. Composite Indices — suggests that the recovery has been progressing more rapidly at the top end of the market. The value-weighted U.S. Composite Index (which weights each repeat sale by transaction size or value and therefore is heavily influenced by larger transactions) began showing gains earlier and has recorded consistently stronger pricing growth than its equal-weighted counterpart over the past three years. This mirrors the trend in the recovery of market fundamentals for commercial property, where demand for Class A office buildings, luxury apartments and modern big-box warehouses has outpaced the broader market over much of the last three years.

Despite the recent dominance of larger, more expensive properties in pricing gains, the upward trajectory of the equal-weighted index suggests that momentum is shifting to the broader market, dominated by smaller, less expensive properties. The value-weighted index’s 4.3 percent gain in 2012 slowed from its double-digit growth rate throughout 2011. At the same time, growth in the equal-weighted index accelerated in the second half of 2012, signifying that investors are moving beyond core properties to drive up pricing at the low end of the market more consistently this cycle.

—CoStar Group Inc.