Commercial real estate news headlines this summer have touted record property sale prices.
Now, the latest monthly CoStar Commercial Repeat-Sale Indices show those deals are hardly outliers.
CoStar’s repeat-sales indices are broken down into value-weighted segments, which reflect big sales often found in the largest markets, and equal-weighted indices, which reflect the more numerous but lower-priced sales in smaller areas.
Both indices hit their highest levels in July driven by vast amounts of capital chasing deals and increasing competition among buyers.
“We’ve witnessed an incredible upswing in the sale-price-to-asking-price ratio, which continues to underscore the competitiveness across the commercial real estate landscape,” said Abby Corbett, managing director and senior economist at CoStar Group and co-author of the latest indices report along with David Kahn, director of market analytics for CoStar.
Corbett added: “The strength of this ratio also illustrates, quite well, just how confident investors are in the deals they’re pursing and demonstrates that they continue to take a long-term view towards investment. The optimism comes despite pandemic-induced uncertainty from shifts in employment, consumer spending patterns, income growth, savings rates, working from home, and migrating populations. Repeat-sales pair counts and volume have returned, and are even surpassing pre pandemic high thresholds, demonstrating that a wide spectrum of properties and deal sizes are trading, and liquidity has bounced back strongly from the worst periods of the pandemic, Meanwhile, we continue to observe historically low distressed trades, which illustrates that ownership conditions are in significantly better shape than compared to the Great Recession of 2008 when we were seeing more than 30% of trades composed of distressed assets – more than 12 times the share we’re seeing now.”
Offers Heat Up
Sellers are achieving record-high sale prices on transacted deals relative to asking prices. The sale-price-to-asking-price ratio surged in July to 94.4%, signaling buyers are increasingly willing to pay top dollar for commercial real estate, according to the CoStar report. The ratio is up from 93.9% in June and from 91.8% recorded in July 2020.
This trend indicates the commercial real estate investment scene has become more competitive in recent months, as buyers are more likely to up their offers on properties in an attempt to win deals.
The time properties spend on the market has stabilized near a record low. The average held steady in July at about 222 days. While the average is up slightly compared to all time lows in 2018 and 2019, the figure is still well below the 10-year average of 313 days dating back to July 2011, and well below the all-time high of 440 days recorded in July 2012.
Pricing in CoStar’s Value-Weighted U.S. Composite Index, which is more heavily influenced by high-value trades, rose once again in July, setting another record. The value-weighted index rose by 1.4% month over month. Year-over-year gains for the index stood at 13.3% as ofJuly as commercial real estate investors demonstrated their conviction for the long-term return prospects offered by high-quality assets, according to CoStar.
Strong year-over-year gains also reflect the recovery in investor sentiment and appetite for large deals, following the relatively quiet period during the height of the pandemic.
CoStar’s Equal-Weighted U.S. Composite Index, which reflects the more numerous but lower-priced property sales, rose for the fifth straight month in July, inching up 0.8% month over month compared to June.
The Equal-Weighted U.S. Composite Index is further broken down into two subindices, the general commercial segment, which is influenced by smaller, lower-priced properties, and the investment-grade segment, which is influenced by higher-value properties. Overall, the equal-weighted index has increased by 15.2% year over year.
The investment-grade segment index rose 1.4% in July, which marks a noteworthy monthly improvement from the segment’s slight downshift in June. The investment grade segment has risen 16.1% year over year.
Meanwhile, the general commercial segment increased by 0.3% month over month, representing a deceleration in price growth compared to June, when prices rose 1.5% month over month. The general commercial segment has increased 14.3% year over year since July 2020.
The latest indices are based on 1,591 repeat-sale pairs in July and more than 249,006 repeat sales since 1996.