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Space demand for small commercial assets dips


Demand for space in smaller commercial buildings continued to cool to begin the year, possibly an early indicator of turbulence ahead for the market for properties under 50,000 square feet, the research company Boxwood Means reported.

For the 30th consecutive quarter, the core commercial real estate market — industrial, retail and office — saw positive net space absorption. This shows that demand for space continued to outstrip the supply. In other words, companies soaked up a net positive amount of space relative to what was available to be leased, including the space added to the market through new buildings or subleasing activity.  

smallcommpropThis positive net-absorption figure, however, has dropped fairly dramatically over the past few quarters.

The first quarter’s positive net absorption, at 16.2 million square feet, was down 27 percent year over year and the lowest quarterly volume in more than five years.

Boxwood Means principal Randy Fuchs said “it is tough to say” whether the market is headed for a downturn.

“Slowing demand is the biggie here,” Fuchs told Scotsman Guide News. “It's not a one-period phenomenon. As my analysis shows, it's a trend over the last four quarters or more.”

Leasing activity, at 40,600 direct leases in the first quarter, also declined 3.5 percent year over year. Fuchs said that the year-over-year decline in the number of direct leases hasn’t fallen as much as the aggregate demand for square footage. Generally speaking, companies are still leasing out properties in high numbers, but they are demanding less space. He said this confirms the trend of companies shrinking office sizes and making more efficient use of space.  

The combined average of 2,760 square feet per lease across all three sectors in the first quarter was the lowest since its tracking began, and represented one third of the average lease size in 2006, Boxwood Means said.

Lesser demand for space has so far had no impact on occupancy levels, which are at record levels, or rents.

The first-quarter vacancy rates in each of the three core commercial sectors ran more than a percentage point lower than their previous record lows. Meanwhile, the new supply of buildings under 50,000 square feet remains soft, Fuchs said.

“My position is that vacancy rates are so low, and new supply so tepid, that it seems to me that it would take a massive shift in new supply to change the current dynamic of tight-space market fundamentals,” Fuchs said.

“So no crystal ball here, but bottom line, with some local exceptions, I see continued tight vacancies in the small-cap CRE [commercial real estate] market and upward pressure on rents for at least the remainder of the year,” Fuchs continued. “That's not great news for small business tenants, but is very favorable for private investors and small-balance lenders if indeed it plays out that way.”

Total sales in January of commercial and multifamily properties priced under $5 million totaled $9.6 billion, Boxwood Means reported. That is down 2.5 percent year over year, but still above the average monthly sales-volume total over the past three years. 


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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