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Commercial Department: Q&A: Boxwood Means: October 2016

 

Q&A: Boxwood Means

Higher demand on small-balance properties

Although there are some indications that the market for so-called small-balance commercial properties — those valued under $5 million — may be starting to ebb, it has remained robust overall during the first half of 2016, following a strong performance in 2015. Businesses absorbed 76.1 million square feet of space in buildings under 50,000 square feet during this past second quarter, up 90 percent year over year, according to research and consulting company Boxwood Means. We spoke with Randy Fuchs, principal and co-founder of Boxwood Means, about the state of the small-balance market and its prospects.

What is behind the solid performance of the small-balance market, and what are the chances that it will continue to thrive?

Even though the cyclical rebound in the U.S. economy has been slower and more inconsistent than other post-recession recoveries, moderate GDP [gross domestic product] growth trends were pivotal in lifting business and consumer confidence, [which] inspired the strong jobs recovery. That, in turn, has led to steady gains in income and, finally, wage growth, too. Let’s not forget that the export boom and the significant reduction in domestic energy prices have also been important drivers behind the well being of the Main Street USA economy and the rise in commercial real estate [CRE] fundamentals. We’re pretty upbeat that in a low-inflation, low-energy-cost environment, the economy will continue to bolster jobs and household spending. That, and the housing-market resurgence, are likely to extend the health of the current CRE cycle.

Is there a segment of the market — office, industrial or retail — that stands out as doing much better or much worse than other small-balance commercial real estate?

By all metrics, the small-balance industrial sector led the other commercial sectors out of the Great Recession and has consistently outperformed. Post financial crisis, demand for warehouse, flex and light industrial/manufacturing facilities has not only been steady, with 23 consecutive quarters of positive net absorption through the second quarter of this year, but also has digested large lots of industrial square footage. With only modest supply, the sector’s vacancy rate has plummeted 430 basis points since the post-crisis high to a national average of 4.2 percent, which is the lowest level since at least 2006. And industrial rents, at a national average of $7.84, according to CoStar data, have recovered nearly 20 percent from the bottom and posted an unprecedented 6.8 percent year-over-year gain during [the past] second quarter. Whether industrial can sustain that, six-plus years into the recovery, is an open question. In fact, during [the past] second quarter, we saw significant advances in both the office and retail sectors as [they] have matured with the economic cycle. As a result, national vacancy rates for both of those sectors hit new lows at midyear.

How significant a threat is e-commerce to small retail buildings?

Well, there’s no doubt that the digital economy represents a paradigm shift threatening some of our traditional shopping activities. While online shopping has disintermediated [eliminated] some brick-and-mortar retailers, I think the future of retail will continue to embrace, at minimum, routine physical trips to local strip centers, grocery-anchored stores and street-retail locations to satisfy needs for everyday products and services. So small neighborhood-based retail isn’t likely to go away anytime soon.

What should mortgage brokers know to improve their clients’ chances of getting loans for small-balance projects?

With the tightening of the debt spigot from some conventional lenders, life has grown a bit more complicated for mortgage brokers sourcing loans for their clients. Alternative sources of capital, from private lenders to specialty finance firms and marketplace lenders, will play an increasing role in providing liquidity in primary and secondary/tertiary markets, albeit at somewhat higher rates of interest than banks. Brokers that adjust to this emerging reality and develop new relationships with alternative lenders will be best-prepared to solve their borrower’s financing needs.

Randy Fuchs is a commercial real estate market analyst with 30 years of industry experience. He co-founded Boxwood Means in 2003 and subsequently pioneered research and analysis of small-balance commercial real estate property and loan markets that today are the focus of Boxwood’s SmallBalance.com platform — which provides property valuations and data analytics. Fuchs has overall responsibility for the company’s administration, as well as sales, marketing and new-product development. Reach Fuchs at randy.fuchs@boxwoodmeans.com.


 

Bill Lewis was editor of Scotsman Guide Commercial Edition. For questions about this article, call (800) 297-6061 or e-mail articles@scotsmanguide.com.

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