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Small-cap CRE market shows mixed signs

The market for smaller commercial building gave off some mixed messages to begin 2017. 

Through March, the amount of space filled in smaller facilities slowed dramatically, although rents and vacancy trends continued to be strong, according to the tracking firm, Boxwood Means.

crefundamentCompanies absorbed a total of 10.8 million square feet in smaller buildings under 50,000 square feet, which was down 65 percent for the first quarter of 2016 and the lowest total in more than four years, the company said.

Analysts have said that although the market for large commercial properties could see a significant slowdown in the near future, the more stable world of smaller properties — where most commercial lenders and Realtors do deals — is on safe footing for at least the next two years.  But the pullback in leasing activity is a worrisome sign, said Randy Fuchs, the principal at Boxwood Means.

“We all know space demand is what makes the CRE world go round,” Fuchs told Scotsman Guide News. “And first quarter’s net absorption across the three principal property types (office, industrial and retail) was uniformly low and a noticeable departure from the recent past.”

Fuchs said that the job growth was uneven in the first quarter, and the direction of tax reform has created some uncertainty that could explain why companies curtailed their leasing activity.

“I think 2Q will tell us a lot more about the outlook for the remainder of this year than Q1’s mixed message,” Fuchs said. 

The small-cap real estate market space recovered nearly two years later than the market for large commercial properties, and tends to move more closely with the health of its local economy than does the market for larger properties, which can be influenced by global capital trends and international events.

Unlike the large-cap world, sales prices of smaller properties haven’t generally surpassed their prior peaks from a decade ago. The exception is the small-cap apartment sector, where the asset prices have exceeded the prior peak. 

Boxwood Means’ commercial price index, which reflects the sales of buildings valued under $5 million across 127 cities, was rising at a 4 percent annual pace in the first quarter, and was 5.3 percent below the previous 2007 peak.

Solid, steady fundamentals

The fundamentals of smaller properties remain solid, and have been supported by a lack of building in the sectors. The supply delivered in 2016 totaled 72.8 million square feet, which was 1.1 percent lower than the 2015 level and represented about a quarter of the average annual deliveries during the market peak years of 2006 through 2008, Boxwood Means reported.

With the tight supplies, industrial, retail and office rents were up 7.3 percent, 7.2 percent and 4.4 percent year over year, respectively, the company said.

The vacancy rate for office properties, at 7 percent, is 1.2 percentage points below its previous low point in 2006, and the industrial vacancy rate, at 3.6 percent, was 2.5 percentage points below its previous low. Retail vacancies at 4.6 percent remained unchanged for the third consecutive quarter, Boxwood Means said.


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