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Studies present differing pictures of small-cap commercial sales

Recent market studies are giving mixed signals about the sales trends of smaller commercial properties.

The National Association of Realtors (NAR) reported this week that the transaction volume of smaller multifamily and commercial assets rose 8.5 percent year over year in the first quarter — which is just the reverse of what happened in the higher-priced asset category, where sales plunged in the first quarter compared to the same period in 2015. 

George Ratiu, a commercial market analyst for NAR, said most Realtors responding to the association's survey broker deals priced under $2.5 million, and sometimes well below $1 million. Compared to the large-cap market, he said, those smaller deals are less affected by fluctuations in the financial markets and the investment moves of big-time investors, like insurance companies, real-estate investment trusts and foreign investors.

So, Ratiu said, it is no surprise that the small-cap market saw an increase in sales for the quarter compared to 2015, and did not mimic the steep drop in sales of large assets. Sales volume of large-cap assets priced over $2.5 million declined by 20 percent in the first quarter, compared to the same quarter period in 2015, according to Real Capital Analytics. 

“The large-cap domain is closely correlated with financial markets,” Ratiu said. “Looking over the last three or four months, we have largely seen a lot of volatility in those markets, stemming from a number of factors.”

Contrasting message 

Meanwhile, Boxwood Means said early data suggests that small-cap market followed the same slowing trend as the market for the larger assets.

Boxwood Means tracks the market for assets priced under $5 million using CoreLogic data. The cumulative two-month sales total for January and February was down marginally in the first two months of the year compared to the pace set in early 2015. However, February's sales numbers for small-cap assets were significantly weaker than sales in February 2015. Sales volume of smaller assets was down by 5.3 percent in February year over year, according to Boxwood Means. 

Randy Fuchs, Boxwood Means principal, said it was too early to say if February's numbers pointed to a slowdown. He said the lower sales figures at the beginning of the year do make sense, however. 

“We came out of a couple of months of where the debt market prices had increased, making it more expensive for borrowers,” Fuchs said. “You had a stock market plunge of 10 percent in January. You had corporate debt prices that also were crazy that affected the [commercial mortgage-backed securities] market. There was just a lot of volatility and lack of direction. The sales mirrored that uncertainty, and borrowers and buyers were pulling back.”

Fuchs expressed confidence that sales of smaller assets would pick up through the year. He said it was unlikely, however, that the total volume would match a record year in 2015.

“There is more uncertainty this year with not only the financial environment, but you have got the election,” Fuchs said. “So I think there is just going to be more uncertainty and less investment activity.”


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