As U.S. real estate markets recover from the pandemic’s fallout, commercial property prices between higher- and lower-dollar deals started to diverge in May, according to the latest monthly CoStar Commercial Repeat Sale Indices.
The widening gap indicates property values in large cities such as New York, Chicago and Los Angeles are recovering slower than markets with smaller populations, according to CoStar analysts.
CoStar’s value-weighted U.S. Composite Index, which reflects larger asset sales that are often found in the largest markets, declined 0.2%, stalling after gains in March and April. In contrast, the equal-weighted U.S. Composite Index, which reflects the more numerous but lower-priced property sales found in small cities, rose by a sharp 1.4%, the third consecutive monthly gain of 1% or more.
The slight divergence last month does not detract from strong performance in both indices over the past 12 months. The value-weighted index increased 8% in the 12 months that ended in May, while the equal-weighted index increased 12% over the same time.
The value-weighted index is more heavily influenced by the larger property sales common in urban markets that were hit hard during the pandemic because of the more intense effect of stringent lockdown measures, reliance on public transit, and their higher population density. In big U.S. cities, pricing growth momentum is lagging behind the more numerous, lower-priced property sales typical in smaller markets that are represented in the equal-weighted index, according to CoStar analysts.
Composite pair volume of 16,879 trades for the 12 months ended in May marked the highest trailing 12-month total since the pandemic hit in March 2020.
When a property is sold more than once, the price change from the pair of first and second sales is used to calculate price movement, and those sales pairs are used to create a price index. The number of transactions for the first five months of 2021 is 36% greater than the first five months of 2020 and 15% greater than the first five months of 2019, representing a good sign for the return to typical liquidity conditions.
Sign More Tenants Are Moving In
Over the 12-month period ending in June, net absorption of available space for three major property types — office, retail and industrial — is expected to increase by 131.7 million square feet in a sign that more square feet of property are getting rented rather than emptied.
The anticipated increase forecast by CoStar represents a shift from negative absorption amid the pandemic in 2020, when significantly more tenants were moving out of space than moving in.
Absorption of available space is expected to be roughly evenly split among market segments.
That's expected to slightly favor smaller, lower-priced properties, at 70.2 million square feet, compared to 61.5 million square feet for higher-value properties.
CoStar’s sales indices provide the market’s first look at commercial real estate pricing trends. Based on 1,468 repeat sale pairs in May, and more than 244,665 repeat sales since 1996, the CCRSI offer the broadest measure of commercial real estate repeat-sales activity.