Investment-Grade Properties See Largest Year-Over-Year Gain Since 2006

CoStar's index tracking repeat sales of investment-grade commercial properties jumped 10.6% in January over the same period last year, the largest year-over-year gain since the height of the real estate boom in 2006.

The increase in the index for higher-quality properties hit a five-year high for January despite dipping slightly from December, a reflection of how hard the index fell a year ago and how strongly it has recovered within 12 months.

"Pricing is all relative," said Chris Macke, CoStar senior real estate strategist. "The fact that January's reading was negative on a monthly basis but the largest gain since 2006 on a year-over-year basis indicates how fast the index was falling a year ago -- and how much it has improved since then."

The volume of investment-grade repeat sales transactions rose 54% in January from a year ago, a significant increase that reflects the appetite of buyers for trophy office, apartment, retail and hotel properties. Sales pairs of general grade properties, which reflect sales of non-investment grade buildings, declined 1% over the year-ago level.

The differences between changes in general sales versus investment-grade sales transaction counts and volumes are significant, Macke said.

"The investment grade pair count volume increase of 54% and the 1% general grade increase reflects the split in the market, which is caused by available financing to a large degree," he said.

Sale pair counts for investment and general grade property likely will both increase slightly when additional closings are recorded.

Meanwhile, the general grade index was down 11.3% in January versus the same period last year, even though general real estate index edged up slightly by 0.4% during the first month of 2011.

After being down 2.4% for the past three months and down 11.3% for the past year, the smaller property index may be approaching the market bottom for the first time in the past three years.

The CoStar National Composite Index, an equal-weighted analysis of both the investment grade and general grade indices reflecting the broad overall market, was flat in the first month of 2011. The composite is down 2.6% and 6.6% for the past three and 12 months, respectively, and down 30.7% from its August 2007 peak.

The March report of the CoStar Commercial Repeat Sales Indices (CCRSI) includes data through January. The CCRSI, a comprehensive and accurate measure of U.S. commercial real estate prices, includes a total of 32 sub-indices in addition to the monthly national composite index, including breakdowns by property sector, region, transaction size and quality, and market size.

CoStar tracked more than $211 billion in total sale transactions in 2010, a 79% increase over 2009. However, sales transaction volume remains 63% below peak market levels, despite the clear recovery taking hold in real estate markets.

In January 2011, CoStar recorded 483 pair sales compared to 434 in the same month of 2010, an increase of 11%. CoStar expects to see pair volume running closer to 20% ahead of January 2010 once additional sales from that period are confirmed and added to the database, in line with the 22% higher volume observed in December 2010 versus December 2009.

Distress sales as a percent of total sales increased in each of the four quarters of 2010, with an increase of just over 20% in the fourth quarter and an increase of 18.5% for all of 2010. By property type, the highest percentage of distress in the fourth quarter was found in the hospitality sector at 36%, followed by multifamily (24%), office (21%) and industrial and retail (both near 19%).

By transaction count, General Grade Index sales accounted for 68% of total transactions in January. By volume, Investment Grade Index sales represented 78% of the total. The average investment grade deal size was $10.5 million in January -- down from nearly $16 million in December but more in line with long-term averages. The average dollar size for general real estate was $1.4 million in January, compared to $1.6 million in December.

Also in the March release, CoStar announced a one-time change in the index methodology effective this month. The monthly numbers are now based on a two-stage/frequency-conversion of rotating quarter procedure, which roughly means the monthly changes will now be anchored to quarterly changes, which results in slightly less noise in changes and movements compared with direct monthly estimates. The quarterly indices methodology and approach have not changed.