The indices have been released for 2012, and they show continued steady strength for commercial property investments.
“Real estate investment returns have a reputation for stability, and 2012 has reinforced that,” says Ron Kaiser, chairman of the National Council of Real Estate Investment Fiduciaries (NCREIF) Board. “Not only have quarterly total returns again come in at the 2.5 percent level, but all property types and nearly all geographic regions report similar numbers.”
The volume of sales surged in 2012, which helped to support these strong returns. Sales volume reached nearly $64 billion in 2012, the highest annual total since 2004, according to the Co-Star Group Inc. Since the crash, the volume of commercial real estate sale has risen steadily, and activity spiked upwards in December as investors rushed to close deals before the end of the year and improving market fundamentals and attractive yields drew investors to commercial real estate.
The recovery is also broadening to the lower end of the pricing market. CoStar’s equal-weighted composite index sped up its growth in the second half of 2012 and registered 8.1 percent for the year. Meanwhile, CoStar’s value-weighted composite index, which concentrates on more valuable properties, registered just 4.3 percent growth. That’s still fast than inflation, but less than its double-digit growth throughout 2011.
According to the CoStar indices, “Investors are moving beyond core properties and driving up pricing at the lower end of the market.”
The numbers from Moody’s/RCA Commercial Property Price Indices, which also sample a broad range of markets and properties, also showed an increase of 8.1 percent for U.S. commercial real estate prices in 2012.
The NCREIF Property Index, which favors institutional-quality properties, also marked stable, solid investment returns. That includes appreciation to the value of properties 4.51 percent in 2012, roughly matching CoStar’s “value weighted” numbers for the year. NCREIF’s property index also includes 5.84 percent returns from income from properties, adding to a total return of 10.54 percent.
Among the various property types, some old favorites still did very well in 2012. The Moody’s/RCA CPPI showed that office and apartment properties in central business districts were the hottest sectors, with price increases of 19.1 percent and 11.2 percent, respectively, for the year. Suburban office was the only sector to see a price decline in 2012, edging down by 0.8 percent.
"The CBD office sector has been a leader in the post-crisis recovery, and both its major and non-major market components posted double-digit returns in 2012," says Moody’s Director of Commercial Real Estate Research Tad Philipp. "The performance of apartments in major markets was just warm during 2012 but the results from non-majors was enough to make it a hot sector overall."
The real estate recovery also spread to retail properties, according to NCREIF. Its index of institutional properties shows that retail properties were the best performing in the fourth quarter with a 2.97 percent total return, and for the whole year with an 11.61 percent return. That’s just ahead of the apartment sector’s 11.23 percent return. The hotel sector was the worst performer for the year with an 8.23 percent return, which really isn’t that bad.