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CoStar’s New Indices May Help Portfolio Owners Chart Prices

Commercial real estate investors have a new tool to measure the performance of their portfolios over time, and to chart prices in the marketplace.

CoStar Group has culled the 1.3 million records in its database to create a new package of commercial real estate price indices. The CoStar Commercial Repeat Sales Indices (CCRSI) are based on a set of 85,000 repeat-sale pairs of transactions, and will be issued monthly.

Price trends can be analyzed by property type, including office, industrial, retail, multifamily and land, according to the Bethesda, Md.-based commercial real estate information firm. Prices also can be charted by location and transaction size. The indices also reveal larger trends.

For instance, an Aug. 4 CoStar report shows that prices rose in major markets over the first two quarters of 2010 following a significant influx of institutional capital in those markets. However, the indices now show a pause in investor activity, related to uncertainty over the national economy and the weak housing market.

Accordingly, preliminary July figures trended down for investment-grade property markets, CoStar reports. Earlier, from May to June, the composite CCRSI declined 7.78%, and investment grade property dropped 4.83%, reversing earlier gains.

Competing with MIT

In developing the indices, CoStar joins a small, select specialty group that already includes Moody’s / REAL Commercial Property Price Index, from the MIT Center for Real Estate and Real Capital Analytics, LLC (RCA). The RCA database, on which the Moody’s/REAL CPPI index prices are based, collects price information on U.S. commercial property sales over $2.5 million, according to MIT.

CoStar’s database recorded more than $1 trillion in commercial real estate transactions as of June 30. The records, covering two decades, include more than 1.3 million commercial property transactions in 250 metro markets. Deals range from less than $100,000 to more than $34 billion apiece.

The new indices use repeat sales to chart prices, registering data based on actual sales prices. When a property is sold more than once, a sale pair is created, and prices from the first and second sales show price movement for the individual property, says CoStar. Aggregating price changes from many sales creates an index that reveals the rise or fall of prices in the national or regional marketplace.

“The time lapse necessary to build a database worthy of such deductions has been the primary obstacle to commercial real estate-based repeat-sales indices until now,” says Norm Miller, vice president of analytics for CoStar Group.

“The CCRSI, based not on median prices recorded at a given time or on imprecise valuations of commercial property, but on the real exchanges of properties, allows for more rigorous and accurate analysis of market cycles, as median prices are very much affected by the mix of properties that happens to sell,” says Miller. “Tracking property prices while controlling for variation in properties sold over time has long been a quest for real estate economists.”

Watching the portfolio manager
The repeat sales indices allow commercial real estate investors to base their business models on real and real-time data indicating the direction of prices, adds Miller. The CCSRI provides a set of benchmarks by which property owners can gauge current price movements.

In some cases an owner may need to use two or three indices, including, for instance, investment grade properties, to develop a custom benchmark to gauge the performance of a portfolio manager, says Miller.

Among the 84,000 sales pairs included in the CCRSI, the largest category, 36%, is apartments. Retail properties represent 21%, and office and industrial, 16% each. Land and hospitality sales represent smaller portions of the total sales.

Most of the transaction pairs have a sales price of less than $1.25 million. Collectively, although some individual prices are higher, the largest sale pair prices fall in the range of $5 million to $10 million.

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