Property Investment Gravitates Toward Smaller Markets With Typically Lower Prices, CoStar Data Shows
By Mark Heschmeyer CoStar News January 31, 2022 | 4:53 P.M.
The growth in commercial property sales prices, which reached historic highs last year, is starting to show signs of waning, according to the latest CoStar data.
While record property sales in the fourth quarter helped keep prices rising, signs of tapering began to show particularly for industrial and multifamily properties, which had been the first to bounce back rapidly from the financial fallout triggered by the pandemic.
The fourth quarter saw a 28.5% increase in commercial real estate transactions over the third quarter. That helped drive repeat-sales pair volume, a broad measure of pricing trends across property types and U.S. geographic regions, to $201.8 billion for the full year — an 86.3% gain over 2020, according to Christine Cooper, chief U.S. economist for CoStar and lead author of the CoStar repeat-sales data report.
The rise in volume was broad-based, with similar gains in both large- and small-dollar sales. CoStar monitors repeat sales when a property is sold more than once and uses the difference in prices to create an index that tracks movement in what investors are paying.
The value-weighted U.S. composite index, which is more heavily influenced by high-value trades common in core markets, recorded a 4.2% gain during the fourth quarter. The index was up 16.1% for the year and is now 25.8% higher than in February 2020, before the onset of the pandemic.
The equal-weighted U.S. composite index, which reflects the more numerous but lower-priced property sales typical of secondary and third-tier markets, advanced by 4.7% in the fourth quarter. The index rose by 15.1% for the year and is now 22.2% above its pre-pandemic level. Uneven GainsThe quarterly gains were not reflected evenly across property types though, according to Cooper.
“The U.S. Industrial Index advanced just 1.1% in the fourth quarter, its slowest quarterly gain in 16 quarters,” Cooper said. “Strong fundamentals have been a boon for investors in this property sector, but price appreciation slowed in the second half of 2021.”
The industrial index gained 16.8% for the year and is 26.4% above its pre-pandemic level. Multifamily property price gains also slowed but remained solid, according to Cooper. The U.S. multifamily index expanded 2% in fourth quarter, its second quarter of decelerating price gains. It advanced 15.6% for the year and is now 27.3% higher than its pre-pandemic level, the fastest recovery among all six property types.
“Part of the slowing of gains comes as capital continues to move down the risk spectrum, as secondary markets have seen stronger pricing gains,” Cooper said.
Investors also avoided core office markets and continued to move into high-growth secondary markets in the fourth quarter. The U.S. office index increased 2.1% and was up 7.6% for the year, the smallest annual gain of all property types with the exception of hospitality. The index is now 13.5% higher than its pre-pandemic level. Hospitality Gains Advance
While annual hospitality gains were soft, they are beginning to recover more quickly from the effects of the pandemic. The U.S. hospitality index registered a 4% increase in fourth quarter, the fastest quarterly gain among all property types, and contributed to an annual gain of 3% for the year — just enough to push it 0.4% above its pre-pandemic level.
The U.S. retail index rose just 0.7% in the fourth quarter, the slowest rate of major property type indices. The index gained 12.5% for the year and is now 17.3% higher than its pre-pandemic level. As the indices noted over the course of last year, the share of repeat-sale trades that were distressed continued to fall, and again fell to another historic low.
Less than 1.2% of all repeat-sale trades were distressed in December 2021. General commercial distressed sales, which reflects the performance of smaller properties, measured just 0.7% in December, the smallest share in the history of the series going back to January 2008.
Investment-grade distressed sales made up of higher-value properties accounted for 0.45% overall in December.
The latest indices are based on 3,106 sale pairs in December 2021 and more than 261,702 repeat sales since 1996.