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Posted February 18th 2011

Investor demand for commercial real estate is slowly starting to increase in select secondary and tertiary markets, but it will be some time before most markets see significant improvement in price or rental growth, according to the CCIM Institute and the Real Estate Research Corporation (RERC).

“With the higher prices being paid for institutional-grade properties in top-tier markets, the sales volume of lower-grade assets in secondary or tertiary markets is increasing,” said Frank Simpson, CCIM, the 2011 president of the CCIM Institute and president of The Simpson Company in Gainesville, Georgia. “While Class B investment opportunities exist in all property sectors and will become more prevalent throughout 2011, some markets are still seeing little or no transaction activity other than distressed property sales.”

In a report released today, CCIM and RERC caution that many characteristics of a trifurcated market will remain in 2011, as the division continues between the top-performing properties, distressed assets, and those properties in the middle.

“Properties are moving,” said Simpson. “What is disappointing is that aggregate prices for smaller size properties are still declining on a size-weighted basis, particularly in smaller markets. Some of this is due to distressed property sales bringing down the average prices. But it also means that demand is just not there yet for many properties—or at least not enough demand to drive up prices.”

According to the groups’ RERC/CCIM Investment Trends Quarterly, the apartment sector reflects where investors are putting their dollars. Total volume increased approximately 30 percent in fourth quarter 2010 on a 12-month trailing basis and approximately 50 percent on a quarter-to-quarter basis. The overall size-weighted average price increased by approximately 5 percent on a 12-month trailing basis, but was mostly flat on a quarter-to-quarter basis.

Total volume for the office sector increased by more than 40 percent from the previous quarter on a 12-month trailing basis, the most of any property type. The increase in volume and price on both a 12-month trailing basis and a quarter-to-quarter basis occurred for property transactions of $5 million and above, indicating that the improvement is concentrated primarily for larger office properties in the major markets.

“Although investors are gazing out into the risk horizon at least in the stock market, they are still looking for safety for certain allocations for their investment dollars,” said Ken Riggs, CCIM, president and CEO of the Chicago-based Real Estate Research Corporation and the CCIM Institute’s chief real estate economist. “And commercial real estate—particularly the apartment sector—is generally safer than stocks.

“CCIM members are more optimistic on return versus risk and value versus price. And although volume is up, particularly for larger properties, it’s disappointing that the aggregate price for smaller-size properties is not increasing significantly, particularly in small-town America,” said Riggs.

Additional findings from the report include:

CCIM members increased their rating of the national economy during fourth quarter 2010, rating it at 4.9 on a scale of 1 to 10, with 10 being high. Members again rated their regional economies higher than the national average, giving the South regional economy the highest rating at 5.7.
CCIM members increased their investment conditions rating for all property types in fourth quarter 2010, with the apartment sector remaining the highest rated overall at 6.6 on a scale of 1 to 10. However, the retail sector increased the most, rising to 4.9 in the fourth quarter from 3.9 in the third quarter, followed by the hotel sector, which increased to 4.8 from 3.9.
On a quarter-to-quarter basis, total transaction volume increased for all property types. However, on a 12-month trailing basis, total volume declined for the retail sector while increasing for the other four property types.
The overall size-weighted average price per square foot/unit increased for the office and apartment sectors only, but declined or remained flat for the industrial, retail, and hotel property sectors, also both on a 12-month trailing and quarter-to-quarter basis.
For property sales of less than $2 million, the size-weighted average prices were lower in the fourth quarter for every property type on both a 12-month-trailing and quarter-to-quarter basis.
For property sales of $2 million to $5 million, the size-weighted average prices increased for office and apartment properties on a 12-month trailing basis. On a quarter-to-quarter basis, the apartment sector is the only sector where the size-weighted average price increased.
For property sales of $5 million or more, the size-weighted average prices increased for the office, industrial, and apartment properties on a 12-month trailing basis. On a quarter-to-quarter basis, the office and apartment sectors were the only sectors where the size-weighted average price increased.

About the Survey
Published quarterly, the RERC/CCIM Investment Trends Quarterly report provides timely insight into transaction volume, pricing, and capitalization rates for core income-producing properties. The RERC/CCIM Investment Trends Quarterly is produced by the Chicago-based Real Estate Research Corporation in association with and for the 16,000 members of the Chicago-based CCIM Institute. To review the report, visit http://www.ccim.com/resources/itqonline.