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Sales of small commercial properties climbing

Sales of smaller commercial properties through the mid-way point of 2016 were running ahead of the pace of 2015’s record year.

Through June, the cumulative sales volume of buildings valued at under $5 million totaled $46.1 billion, up 1.6 percent over the same period last year, Boxwood Means reported. June sales fell by 1.7 percent from this past May, however, clocking in at $7.7 billion for the month.

Small officeRandy Fuchs, Boxwood Means principal, said the figures were preliminary for June, and likely will be revised upwards to show a monthly gain over May's sales volume. 

“The more important overall sales number is that first-half sales volume is ahead of last year's record pace,” Fuchs told Scotsman Guide News.  

“If that transpires [through the balance of the year], total small cap CRE [commercial real estate] sales will have expanded for six consecutive years since the end of the Great Recession, including 2015's 160 percent increase over the 2009 figure, and by year end, 2016 will be knocking on the door of a $100 billion market,” Fuchs continued.

In 2015, sales of small commercial properties totaled $96.4 billion. Fuchs didn’t see much to threaten the momentum of sales this year.

“The economy is still growing, employment and personal-income growth are positive, and CRE-space market fundamentals are about as good as they can be,” Fuchs said.

“Small cap CRE asset prices are much more reasonable generally than in the larger domain. And interest rates are so low that a modest increase, if imposed this fall, is unlikely to cause much distress or kill many deals,” he continued. 

The National Association of Realtors (NAR) recently noted that its surveyed Realtor members are concerned about a shortage of inventory for sale and a rising gap between sellers and buyers in pricing expectations. Banks also have tightened their underwriting standards this year, NAR said. 

NAR analyst George Ratiu doubted that the overall sales volume of commercial real estate of all sizes this year would beat the 2015 total. Sales of large assets in major cities slowed through the first two quarters. Ratiu said it was possible, however, that the sales volume of small assets would surpass the total for 2015. He noted that the market recovered for small properties started in 2013, three years after the recovery began for large properties in major markets. 

“The market for these properties, especially in secondary cities where yields are also higher, remains very strong,” Ratiu said

Sales have been driven by strong leasing fundamentals, rising rents and only modest new supply.

Sales activity of smaller properties has generally heated up in secondary markets and cooled off in the six largest cities. In the first half of the year, of major cities, only Phoenix and Philadelphia have seen sales volume increase over 2015 levels, Boxwood Means reported. Meanwhile, 30 smaller cities have seen gains in transaction volume of at least 30 percent over the 2015 level through June, and 73 of the 122 markets tracked by Boxwood Means have posted year-over-year gains through the first half of 2016.  

Major investors, including foreigners, have been focusing more on secondary markets, Ratiu said. 

“They might not necessarily put [their money] in a corner gas station, but they are looking at office buildings in places like Nashville, Tennessee, or St. Louis, markets where traditionally a sovereign wealth fund might not have looked,” Ratiu said.

“They are beginning to look at these markets because their local economies are strengthening,” Ratiu continued. “When they look at the returns that some of these properties are offering, they are very compelling.”  


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