Prices and investment volume in the U.S. commercial real estate market dropped for the second month in a row in February, even as strong leasing activity strengthened net absorption and CRE fundamentals in the first quarter 2016, according to a new report from the CoStar Group.
CoStar’s Commercial Repeat-Sale Indices (CCRSI) found that February’s decline was evident in both the value-added and equal-weighted U.S. Composite Indices, the broadest measures of aggregate pricing for commercial properties within the CCRSI.
The value-weighted index, which is primarily influenced by larger transactions, dropped by 0.6%, CoStar said, while the equal-weighted index, which reflects activity in a greater number of smaller deals, declined 0.8%.
At the same time, investment sales volume throughout the commercial property sector also fell in February as compared to the fast-paced volume a year ago. Observed repeat-sale trades dropped 12.1% ending February 2016, compared with the same period in 2015, according to the CCRSI.
The decline in sales activity was evident in both the high and low-end sectors of the U.S. commercial real estate market, as the composite pair count dropped 10% in the investment-grade segment and 12.6% in the general commercial segment in the first two months of 2016 compared to the same period a year ago, CoStar reported.
Despite the sales and pricing slowdown, leasing activity was still robust, the report noted. Total net absorption in the office, retail and industrial markets stood at of 155.1 million square feet, contributing to the total 655.1 million square feet of net absorption for the 12 months ending in March 2016, up 10.7% from the same period n 2015, according to CoStar.
Investment-grade properties saw the strongest year-over-year absorption growth, CoStar noted, growing by 14.8% in the past 12 months compared to the same period last year and reflecting the “flight to quality” among tenants. The general commercial segment grew by 1.9%, CoStar said.
The two-month slowdown may indicate that pricing in the U.S. commercial real estate market may have hit a plateau for the 2016 cycle, according to CoStar’s analysis, with trends suggesting the two composite indices could level off this year following years of steady appreciation at an average monthly pace of 1%.
Commercial property markets have performed remarkably well over the past several years, CoStar said, pointing to limited new construction and the ongoing economic expansion that aided in holding vacancies near cyclical lows and spurring rent growth. The strong performance is evident in the CCRSI value-weighted index, which surpassed its prerecession peak by nearly 20%, while the equal-weighted index came to within 5% of its previous peak, according to Co-Star.
2016’s price growth is being negatively impacted by the overall global economic uncertainty and higher interest rates that jointly have begun to apply upward pressure on capitalization rates, CoStar noted.
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