Small-Cap CRE Leasing Activity Rebounds

Michael Tucker

February 23, 2018

Small-cap commercial real estate leasing activity rebounded "smartly" during the fourth quarter, though overall demand for the year came up short compared with 2016, reported Boxwood Means, Stamford, Conn.

"Small business growth has supported a trifecta of vigorous small-cap property fundamentals, peak sales and robust loan originations that shows few signs of abating soon," said Boxwood Means Principal Randy Fuchs.

After a "lackluster" third quarter, net absorption more than doubled during the final quarter to 30.2 million square feet across the small-cap office, industrial and retail sectors, Fuchs said. But a strong close to the year could not overcome the relatively weak annual activity, he noted.

"That being said, tenants remained active if not confident over their business prospects as more than 170,000 new small-cap direct leases were signed across the three sectors during 2017, down just 9.5 percent compared with the year before," Fuchs said.

Small-cap industrial asset net absorption posted its best quarterly increase of the year, jumping 164 percent to 10.5 million square feet, Boxwood said. Similarly, fourth-quarter office occupancies rose 112 percent to nearly 5 million square feet. The retail sector also recorded a more than a 100 percent increase with 14.8 million square feet absorbed--also the best quarterly increase all year, but insufficient to offset the overall 54 percent decline in retail net occupancies year-over-year.

"Once again small-cap commercial vacancy rates plumbed new depths," Fuchs said. "Total vacancies for each of the three sectors edged further into uncharted territory." The aggregate small-cap vacancy rate dipped 0.1 percent to 4.5 percent by year end.

Fuchs said total small-cap retail vacancies decreased by 10 basis points, surprising in an environment of near-daily store-closure headlines. "Retail is a diverse asset class, and small strip and neighborhood centers and small retail stores catering to everyday consumer needs have performed well in the post-crisis era," he said. "As the trajectory of its national vacancy rate suggests, small-cap retail has significantly out-performed many large and institutional retail assets."

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