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Small commercial property market is waning

The market for small commercial assets continues to show signs of cooling off. Demand for space in smaller buildings — properties under 50,000 square feet — hit a five-year low in the third quarter, according to the tracking company Boxwood Means.  

Rents, occupancy rates and asset sales prices remain solid for small commercial assets, but net leasing activity is falling fast.

smallmarket“I do believe, at eight years running, that the market's expansion is nearing its limit,” said Randy Fuchs, principal for Boxwood Means. He noted, however, that this doesn’t necessarily mean that the "bull market is simply going to die of old age.”

Third-quarter gross domestic product (GDP) growth “suggests a U.S. economic growth spurt that may give small tenants and small-business real estate owners more confidence to come back off the sidelines and expand facilities next year,” Fuchs told Scotsman Guide News.   

In the third quarter, companies absorbed 7.8 million square feet, which is down 86 percent year over year, Boxwood Means reported this week, based on an analysis of CoStar data. Over the past three quarters, net absorption totaled 46.1 million square feet, one third of the total through the same period in 2016. Leasing activity is down sharply in the three major asset classes, including office (down 94 percent year over year), industrial (down 89 percent) and retail (down 80 percent). Construction of new buildings also is up by double-digits compared to last year. 

Small-cap multifamily sales

Sales data appears to tell a mixed story. The National Association of Realtors (NAR) reported that commercial real estate sales volume rose year over year by 3.6 percent in the third quarter, and asset prices were up by 3.9 percent. NAR's figures are based on a quarterly survey. Roughly 85 percent of the surveyed Realtors only report deals involving properties priced $2 million or less.  

"Compared to a quarter ago and even the first quarter, clearly the growth is slowing down," said George Ratiu, NAR managing director of Housing & Commercial research. "At least activity remains on an upward trajectory through the third quarter."  

Ratiu said commercial Realtors were upbeat about market conditions during NAR's annual convention last week in Chicago.  

"What I got from them is that in their markets, this has been the busiest year some of them can remember," Ratiu told Scotsman Guide News. "For some, it is the busiest in 10 years."    

Boxwood Means, based on CoStar data, reported that the volume sales of multifamily assets fell sharply during the third quarter, however. Sales for multifamily assets fell 16 percent from the second quarter, to $4.5 billion, the company said.  

Over the last three quarters, multifamily sales were down 8.8 percent, to $14.4 billion, compared to the same three quarters in 2016. Boxwood had no available aggregated sales data for retail, industrial and office assets for the entire U.S. market.

Sales transaction volume in other commercial asset types was down sharply in some cities where the data is available. For example, transaction volume in the office market fell by double digits year over year in the third quarter in Denver and Des Moines, Iowa, according to Boxwood Means. 

This story was updated with information from the National Association of Realtors. 


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