With 2014’s increase in pricing levels and occupancies, vacancies that remained near cyclical lows, and rent growth that registered significant gains across property sectors and regions, commercial real estate enjoyed a very good year that garnered the continued attention of investors both large and small, according to a new CoStar release.
The February 2015 CoStar Commercial Repeat Sale Indices (CCRSI) analyzed commercial property sales through end of year 2014 to present one of the broadest measures of commercial real estate repeat sales activity.
The release noted that with investors continuing to earmark funds for commercial property, the value-weighted U.S. composite index in the CCRSI rose 11% in 2014 to reach 5.7% above its previous peak in 2007. The indices also noted that while investor demand for core assets remained high, investors seeking higher yields increasingly moved toward secondary markets.
The equal-weighted U.S. composite index was up 13.3% in 2014, the CCRSI said. This index, which weights each sale transaction the same regardless of sale price, more accurately shows the impact of smaller transactions and those in secondary markets. The index was still 14% below its previous peak, indicating that a maturing cycle will allow for even greater price appreciation.
The release also highlighted quarterly property type and regional indices, finding that the CCRSI Multifamily Index, which hit its prerecession peak in earlier in the year, increased 11.7% more and now stands above its 2007 high. Other major commercial property type indices seeing strong growth in 2014 but still under previous peak levels by more than 10% were: the Retail Index, the Industrial Index and the Office Index.
The release also noted the following property type pricing trends:
- The Office Index (pricing up 9.5%) saw overall office market fundamentals post significant improvements as vacancies dropped to 11.3% in 2014 from 11.9% in the year prior. Net absorption rose a strong 40% from 2013 level
- Multifamily pricing continued to grow in 2014, rising 11.7%. Bolstered by investor demand for well-leased assets in core coastal markets and increased availability of debt financing, the Multifamily Index was the first property segment to start its recovery.
- The 13.9% gain in the Retail Index was 2014’s single largest annual increase among the four major property types. Demand for retail space outpaced supply two-to-one, causing a 20-basis-point drop in vacancies to 6.3% in the fourth quarter 2014, while annual rent growth was steady at almost 3%.
- The Industrial Index grew a healthy 11.9% in 2014. With low vacancy levels and relative lack of supply, industrial rent growth was the strongest of the four main property types for the entire year, up 4.3% in 2014.
- After a year of relatively flat growth in 2013, the Hospitality Index jumped 17.7% in 2014. National hotel occupancies hit their highest level in nearly a decade.
- Increased demand for development sites drove the Land Index up 19.9% in 2014, which was still 28.9% below the last cycle’s peak.
Regionally, pricing in the Northeast Composite Index grew steadily in 2014 to within 1% of its previous 2007 peak due to the region’s strong concentration of top-tier markets that attracted investment early in the cycle. The Northeast’s outperformance can be traced most significantly to the Northeast Multifamily and Retail Indices, which surged past prior peak pricing levels in 2014 by 25.2% and 8.4%, respectively.
However, with a maturing cycle and rapidly rising prices in key Northeast markets, the region is no longer outstripping price gains in the rest of the country. The Northeast regional index, in fact, posted growth of only 10.5%, the slowest of the four major regions.
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