WASHINGTON, DC—With a combination of steady employment growth, continued low interest rates—at least for now—and ongoing global uncertainty, commercial property pricing maintained its upward climb in the third quarter, CoStar Group said Friday. However, if a rising tide lifted all boats in Q3, it did not lift all of them to the same water-level.
Pulling ahead during Q3 was a market segment of CoStar’s Commercial Repeat Sale Indices that had lagged investment-grade properties earlier in the recovery. CoStar says the General Commercial segment, consisting mainly of smaller property sales more typical of secondary and tertiary markets, led the equal-weighted index within the CCRSI.
Thanks to improving fundamentals and higher yields that are driving increased investment to this lower-end market segment, the General Commercial segment advanced 2.9% in Q3 and 11.5% for the 12 months ended Sept. 30, lifting it to within 6.5% of its previous peak. The Investment-Grade Index, which has already risen to within 2% of its prior peak, posted more modest growth of 1.4% in Q3, and 9.6% from the year-ago period.
The two broadest measures of pricing within the CCRSI—the equal-weighted US Composite Index and the value-weighted US Composite Index—advanced by 2.6% and 2.9%, respectively, in Q3. The quarterly performance contributed to gains of 11.2% and 12.2%, respectively, for the 12 months ended that ended Sept. 30.
Although hospitality and land withstood the largest peak-to-trough declines in the last downturn of any of the six property types in the CCRSI, the two indices posted the strongest gains of any over the past 12 months. The US Land Index increased 17.8% over the preceding 12 months, rising to 18.1% below its pre-recession high, while the US Hospitality Index surged 13% during the same period, moving to within 11% of its previous high. It’s now up 60% from its recession-era trough.
Multifamily continues its reign as the belle of the investors ball, and while its year-over-year index growth came in behind that of hospitality and land, it remains strong even amid already-elevated pricing and heavy construction. CoStar’s Multifamily Index increased 3% in Q3 and 12.4% over the year-ago period, pushing the index 15% above its prior peak.
CoStar says pricing in the retail sector remains bifurcated, with undersupplied urban areas seeing gains in both prices and rents, notwithstanding. However, rents and pricing continue to lag in less-dense suburbs that still face a chronic oversupply of store space. These suburban locations brought down the overall US Retail Index to a still-solid 10% over the past 12 months, while for prime retail the gain in the index was 11.4%.
Performing slightly better overall was the US Office Index, which advanced 2.7% in Q3 and 10.3% Y-O-Y. However, the core gateway markets propelled CoStar’s Prime Office Metros Index to an even stronger 12% in the preceding 12 months; pricing in the sector is now within 1.2% of its prior peak level.
Price growth for the industrial sector advanced 2.6% in Q3 and 10.9% in the 12 months that ended Sept. 30. The Industrial Index is now within 6.3% of last cycle’s peak. “This suggests more room for price appreciation as rents continue to rise, but space markets are expected to become increasingly competitive as construction levels increase,” according to CoStar.