Prices for Small-Cap Prices Rose in October by 41 bps
Tuesday, 23 November 2010
Commercial Real Estate Direct Staff Report
Prices for small-capitalization commercial properties increased for the fourth straight month in October, further supporting the idea that pricing is indeed on the upswing.
Prices rose by 41 basis points during the month, according to the Small-Cap Price Index, which is compiled by Boxwood Means Inc., a Stamford, Conn., research company that tracks rents, vacancies and sales prices at properties in 120 markets that change hands for less than $5 million. The 90.2 index value for October is up 2.2 percent over the past three months.
Boxwood Means supplies its small-cap data and analytics via its Web site, SmallBalance.com.
Two other indices that track properties with generally larger capitalizations had posted pricing increases in September. They have not yet reported results for October.
While small-cap property values are still down sharply from their 2007 highs, they have been rebounding in recent months. That, according to Randy Fuchs, co-founder of Boxwood Means, is likely because investors are "anticipating that things are stabilizing and will be better." He said that a more vibrant lending market is also likely playing a role in the pricing increases.
"After substantial write-downs this year, many banks are in a much better position to unload loan assets in the months ahead as market prices approach carrying values," he said, adding that banks hold some $1.5 trillion of commercial real estate debt, most of it backed by small-cap properties.
Boxwood Means tracks a wide variety of property types, including mixed-use and medical offices in both primary and secondary markets. Its index is not a traditional repeat sale index like those developed by CoStar Group or Real Capital Analytics. Instead, it uses a variety of statistical tools in order to determine pricing for what would be considered generic buildings in specific areas.
While property pricing has improved nationwide, some pockets of weakness remain. Prices in Las Vegas, for instance, were down 2.3 percent in October; Miami was down 1.1 percent and Phoenix was down 2 percent. But the upward movement in some depressed markets, such as Detroit, which saw pricing improve by 3 percent, could indicate that as pricing has stabilized in major markets, investors are turning their sites to secondary markets and, in some cases, to what had been extremely hard hit areas.
Property pricing, Fuchs noted, is very reliant on broad economic conditions. While property fundamentals are still weak, the thinking is that economic conditions ought to improve. "The investment sales market is anticipating improvement," he said. "Investors are buying low."
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