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Sales of small commercial properties dip, but remain on pace for a record year

After a fast start to the year, sales of small commercial properties showed signs of slowing down this fall, although they still remain on course for a record year, Boxwood Means reported.

Transactions involving commercial and multifamily assets valued under $5 million declined to $6.8 billion in October, down 9.6 percent from September. Sales of small-cap commercial properties have tapered off over the four months ending in October, to an average volume of $7.5 billion, since peaking in June at $8.8 billion.

Also, in an otherwise strong quarter overall for small-cap loan volume, originations under $1 million — which includes purchase and refinance loans — slowed to a total of $13.1 billion in the third quarter, down 4.5 percent year over year, Boxwood Means said. These loans accounted for 28 percent of the originations in the small-cap market.

Boxwood Means Principal Randy Fuchs said overall the market for smaller commercial properties in 2015 is on pace for a record year for transactions and loan volume, but the numbers were showing signs of weakness as the year finished out. Year-to-date through October, sales totaled $75.2 billion, which is 11.3 percent ahead of the pace in 2014. 

“Most other people are saying everything will be hunky-dory in 2016,” Fuchs said during a telephone interview. “Some of the information that we have suggests that there could be a little bit of a slowdown. That doesn’t necessarily mean that it is the end of the bull market on investment sales in the small-cap space, but it may trend a little slower in the first part of the year.”  

For commercial assets under $5 million, excepting multifamily properties, prices through October have risen an estimated 4.6 percent year over year, but were still running about 9.4 percent below the October 2008 peak on a national basis, Boxwood Means reported.

By contrast, global investors have pushed the prices of larger assets above the prior peaks. 

“In the larger commercial property world, there is so much global money,” Fuchs said. “That money is going to get placed, or some portion of that money is going to get placed anyway. It needs to be. By contrast, you don’t have that kind of supply of capital going into small commercial properties. It is more sensitive to local economic and real estate conditions.”

Recent data has suggested that sales of large-cap assets are also slowing down.

Large-cap assets 

Preliminary data suggests that sales volume declined in the fourth quarter, said Jim Costello, senior vice president with Real Capital Analytics (RCA). RCA separates its data out into four price categories ranging from $2.5 million to over $100 million. Costello said prices were down in all the categories, except for properties priced above $100 million, but he stressed that the data is preliminary.

“We are still getting figures in for [the fourth quarter] and breaking deals down by size range, we see declining year over year growth for everything under $100 million," he said. Costello said information on the bigger deals tends to come first, and there is usually a lag before the data on the smaller deals.

In the third quarter, sales of properties priced between $2.5 million and $10 million increased by 6.7 percent year over year, RCA data suggests.   

Fuchs said the economy and property fundamentals are encouraging. Small-cap commercial properties tend to move with the housing market, which has been improving.

Prices of small-cap properties increased in 100 of the 117 markets that Boxwood Means tracks in October and gained at least 1 percent over three months in 60 markets.

Purchase loans for commercial properties under $1 million represented 39 percent of all the loans in that bracket during the third quarter. That is a high concentration and suggests that small private investors and business owners have been active, Boxwood Means reported.

Commercial originations under $5 million remained strong in the third quarter, totaling $46.2 billion. That was up 5 percent from the second quarter and 8.7 percent year over year, the company said. Through the third quarter of 2015, the originations have totaled $129 billion. Loan volume set a record in 2013 at $176 billion.  

“We are only off by 3 percent of that record year through three quarters,” Fuchs said. “Given the economy, the space market fundamentals, the traffic lights are all green. I think there is a very good chance that originations set a new record [in 2015], same with property sales.” 



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