Commercial Real Estate Index
property sales, driving total industrial sales up 95 percent over 2009. Due to declining prices for warehouses, the industrial sector was the
only one to register no increase in average prices for the year. Meanwhile, retail properties closed $19.8 billion in sales, driven by investor
interest in strip centers, which accounted for 58 percent of sales. Average prices for retail buildings increased 9. 1 percent in 2010, to $159
per square foot. Cap rates for industrial properties declined from 8. 5 percent in 2009 to 8. 3 percent in 2010, while those for retail remained
unchanged at 7. 9 percent.
After the severe decline in the hotel sector during 2009, this past year provided a slight rebound. With the large number of distressed
properties entering the market at attractive prices, investors found hotel properties to be a great value proposition. As a result, sales of hotels
shot up 427 percent in 2010, with full-service properties making up the bulk of the sales volume. In a telling sign, prices also increased 66
percent, to an average $161,751 per unit, while cap rates declined noticeably from 9. 1 percent in 2009 to 6. 6 percent in 2010.
On the other hand, commercial REALTORS® had a challenging and difficult 2010. In contrast to the broader markets, investment sales
and prices declined throughout the first half of the year for commercial REALTORS®. During the year, about 40 percent of commercial
practitioners reported no sales transactions. However, sales flattened out in the latter half. By the fourth quarter, 64 percent of commercial
REALTORS® had completed a sales transaction. Sales of commercial properties were up 0.8 percent during the last quarter of 2010 compared with the previous year. During the same period, prices declined 16 percent.
The main culprit for the slow pace of transactions was available credit. In sharp contrast with major properties in large metropolitan
areas, a significant number of REALTORS® handle properties in smaller cities where financing is handled by local and regional banks.
Following the credit tightening of the past two and a half years, many potential buyers and small businesses have been struggling to secure
SIOR Index Results
With an improving economy and a stabilizing commercial sector, the office and industrial markets are continuing to provide encouraging
signs. The January 2011 SIOR Index representing fourth quarter 2010 data, advanced 8. 1 points, the largest quarter-to-quarter gain in more
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The SIOR Commercial Real Estate Index is constructed as a “diffusion index,”
a very common and familiar indexing technique for economic measures. Other
examples of diffusion indexes include the Index of Leading Economic Indicators,
the Consumer Confidence Index, and the Institute of Supply Management’s
purchasing Managers’ Index. In the SIOR Commercial Real Estate Index, a value of
100 represents a well-balanced market for industrial and office property. Values
significantly lower than 100 indicate weak market conditions; values significantly
higher than 100 indicate strong market conditions. The theoretical limits of this
Index are a low of zero, and a high of 200, though it is unlikely that such limits
would be approached as long as the property markets are operating efficiently.
The Index is based on a survey questionnaire with ten topics. The topics
covered are ( 1) recent leasing activity; ( 2) trends in asking rents; ( 3) trends in
vacancy rates; ( 4) subleasing conditions; ( 5) levels of concession packages in
leases; ( 6) development activity; ( 7) site acquisition activity; ( 8) investment pricing levels; ( 9) the impact of the local economy on the property market; and, ( 10)
the effect of the national economy on the property market. Survey respondents
are given five choices. For each topic, five choices are provided, corresponding
to conditions that are very weak, moderately weak, well-balanced, moderately
strong, or very strong.
For each question, answers are tallied and the percentage of responses for
each of the five choices is calculated. If survey panelists indicate “very weak”
conditions (the “a” choices in the questionnaire), the answer is assigned 0 (zero)
points; “moderately weak” (“b” answers) earn 5 points; an indication of “market
balance” (“c”) receives 10 points; “moderately strong” indications (“d”) score 15
points; and “very strong” (“e”) responses receive a maximum 20 points. Thus a
score of 10 for a given question can be earned if responses are evenly distributed
across all five choices, if all responses were “c”, or if the answers form a “
bell-shaped curve” centered around the “c” choice. The total index value is derived
by summing the scores for all ten questions. Index values for each of the two
property types are similarly calculated.
The survey was developed by Hugh F. Kelly, CRE, clinical professor at New
York University, who worked with SIOR on research projects from 1989.