Economy Watch: CRE Prices Continue to Rise

By Dees Stribling, Contributing Editor

On the whole, commercial property values experienced increases in 2014, and this year will probably also be as good in terms of increasing valuation. That’s good for owners and sellers, but theoretically less good for investors, though the massive amount of capital looking for a home in CRE still has faith in the continued upward pressure on values. As long as the economy continues its recovery, a bet on increasing CRE values is probably going to be a good call.

According to CoStar’s most recent report on CRE prices, the company’s the value-weighted U.S. Composite Index reached a record high in January 2015, and now stands 7.5 percent above its previous (and pre-recession) peak in 2007. That reflects competition among investors for large, high-quality commercial properties. The equal-weighted U.S. Composite Index has grown as well over the last year, but it’s still 13.4 percent below its 2007 peak. That index is influenced by smaller deals, and reflects the movement of capital into secondary markets and property types, as investors look for higher yields as core-market properties get a bit too rich for their blood.

Another CRE trend worth noting that’s highlighted in the CoStar report: Distressed sales have fallen off a lot. The distress percentage fell to 9.3 percent for the 12 months ended January 2015, compared with 16.2 percent in the prior 12-month period. Much of the distressed inventory—and it’s taken quite a while in working it through—has now been dealt with in one way or another. During the worst of the recession, as much as a third of commercial deals involved distressed properties, and while the current percentage isn’t quite as low as during the “normal” markets of the pre-recession years, it’s pretty close.

Also, according to the report, the average time on market for commercial properties fell 6.6 percent (investment sales, not leasing). As a liquidity indicator, the number of days on the market hasn’t recovered to pre-recession levels, though it has gotten better. At one point, properties sat on the market for as much as 400 days on average, well over a year. More recently, it’s just over a year. Before the recession—in 2007—the length was around 250 days. Finally, the share of properties withdrawn from the market by discouraged sellers declined by 4.6 percentage points to 35.2 percent in the 12 months ending this January. Also not a stellar number, but certainly an improvement.