Small-Cap CRE Ends 2015 on High Note; Future Questions Arise

Tucker, Michael

February 17, 2016

Bolstered by stable economic growth, net absorption of sub-$5 million industrial, office and retail properties exceeded 150 million square feet during 2015, reported Boxwood Means, Stamford, Conn.

A strong fourth quarter gave the small-capitalization real estate market its third-highest annual absorption total of the last 10 years, said Boxwood Means Principal Randy Fuchs. Demand rose 4.4 percent during the fourth quarter.

"But questions arise about future leasing momentum," Fuchs said. "Despite the elevated year-end demand figures, annual demand trailed the high-water mark set in 2014 during the post-financial crisis era. Fourth quarter commercial net absorption actually declined year over year." He noted that 2015's sum fell 12.7 percent compared to the year before.

Fuchs called it clear that investors in both small- and large-cap CRE segments recently "eased off the gas pedal" in light of interest rate uncertainties as well as global concerns, primarily about China. "But both domains are coasting to annual record or near-record high volumes nonetheless and, at these heights, some investor temperance that offsets the market's general exuberance is probably a good thing," he said.

Nearly 100 cities posted small-cap CRE annual price gains in the latest month, up from 82 metro areas 12 months earlier. With 104 cities showing price increases over the latest three-month period, Boxwood's index of small cap commercial non-multifamily prices recovered to within 9.2 percent of its pre-recession era peak. 

Florida and California cities dominate the list of strengthening markets, accounting for 12 of the top 15 metro areas with the best annual returns. But despite this recent strength, these cities still face a long path to full recovery, having retraced on average only 21.3 percent of their recession-period losses, Boxwood reported. 

With so many asset values meaningfully below peak levels of 10 years ago, coupled with lower market rents, "bridge and mezzanine lenders will especially be busy for another year helping small-balance borrowers refinance their debt," Fuchs said.

Boxwood predicted U.S. economic growth will rebound in the first quarter with stronger contributions from consumer and investment expenditures. "That will spell good news for the durability of the commercial real estate market upcycle and another favorable year for small-balance lenders and investors," Fuchs said.

Share this article