Small-Cap Sales Dip, But Remain Strong

Tucker, Michael mtucker@mba.org 

September 20, 2016


Sales volume for commercial and multifamily assets under $5 million dipped slightly to $7.7 billion in June, but the sector's overall trajectory remained strong, reported Boxwood Means, Stamford, Conn.

Small-cap sales fell 1.7 percent in June, the most recent data available, Boxwood Means Principal Randy Fuchs noted. But cumulative sales through the first half totaled $46.1 billion, "ahead of last year's sum and on pace to challenge 2015's record sales volume," he said. 

Smaller markets continue to see disproportionate small-cap lending activity, Fuchs said. "Sales activity continues to tilt in favor of secondary and tertiary markets that increasingly present solid investment opportunities for local players,." he said, noting the six biggest population centers garnered 20.7 percent of total deal volume in June, down 90 basis points from the same month last year and down 250 basis points from 2014. 

On the other hand, 30 smaller cities with at least $100 million in cumulative sales through June posted year-to-date sales gains of 30 percent or more, led by Colorado Springs, Colo., Tulsa, Okla. and Daytona Beach, Fla. Fuchs noted that 60 percent of the 122 markets Boxwood tracks generated first-half sales that exceeded their volume from the same six months of last year.

Fuchs said large-cap sales declined as prices increased, yields slipped and investor risk aversion grew. "Risk appetite among investors in the large-cap arena waned during the first half as the financial markets took an early hit in 2016 and high asset prices confronted buyers with less attractive yields," he said. 

Whether the January-June correction in large-cap CRE deal volume will persist into the second half of the year is unclear, Fuchs said. But he called both small-cap and larger-cap commercial real estate "very tempting" as an asset class, in part because an accommodating U.S. monetary policy has diminished yields on fixed-income alternatives.

"Couple the lack of investment alternatives with commercial real estate low vacancies and climbing rents, and there is every reason to believe that both small- and large-cap investors alike will sustain a strong pace of asset purchases in the year's second half," Fuchs said.

The Mortgage Bankers Association will host a Small Balance Lending webinar on Oct. 7 to examine the sector in detail. Click here for more information.

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