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Small-Cap Properties See Sales, Pricing Slowdown
Monday, 03 October 2011
Commercial Real Estate Direct


Sales of small-capitalization commercial properties have begun to soften, according to Boxwood Means Inc.

The Stamford, Conn., research company, which tracks rents, vacancies and sales prices of properties valued at $5 million or less, said $2.8 billion of transactions took place in July. While that's up 6.7 percent from roughly $2.6 billion a year earlier, it is far short of the $3.8 billion monthly average for the past three months.

What's more, prices for small-cap properties have begun to soften as well, with an index that Boxwood maintains, the Small-Cap Property Indices, or SCPI (pronounced Skippy), falling by 0.8 percent to a value of 86.5 last month. That's the fourth straight month of pricing drops. The index is down 2.6 percent when compared to last year. It was set to 100 in July 2006.

The softening mirrors the large-cap property market. Real Capital Analytics, which tracks the sale of properties in deals valued at $2.5 million or more, also has seen a sharp slowdown in deals.

In July, for instance, it recorded $13 billion of transaction activity, an increase of only 13 percent from a year earlier, marking the smallest year-over-year increase in sales volume since December 2009. And it expects investment-sales volume for the third quarter to be up by 20-25 percent from the same period a year ago. That represents a substantial softening when compared to the first half's volume, which was up more than 100 percent from a year earlier.

Continued economic malaise is to blame, according to Randy Fuchs, co-founder of Boxwood Means. "Investors remain skittish," he said. "The business climate is unclear, so business owners aren't investing in plants and equipment." He noted that more than 50 percent of the properties his company tracks are owner-occupied.

He noted, however, that the drop in values has not been consistent across all markets. A sub-index that tracks the country's 20 largest markets saw a 1.2 percent increase in values. That mirrors the Case-Shiller housing-value index, which recorded a 0.9 percent value increase in the country's top-10 and -20 markets. But that increase was more than offset by value declines in the remaining 100 markets it covers.

Boxwood Means, which tracks roughly 3,000 to 5,000 transactions on a monthly basis, previously had found a strong correlation between the performance of the residential housing market and the small-cap commercial property market.

Meanwhile, property fundamentals are "frail", according to Boxwood Means. The properties it tracks generally have less than 50,000 square feet each. It has updated its rental data to reflect August rents and found that rents at industrial properties fell by 0.22 percent in July to an average of $6.62/sf. Rents at retail properties, which encompass free-standing buildings, street retail and other retail properties, fell by 0.25 percent to an average of $16.54/sf. And office rents were down 0.32 percent to $16.40/sf.

"The fact is, national rents are still carving out new cyclical lows," the company said.

Another metric the company tracks, Days on Market, increased in July, showing that prospective tenants are more reluctant to lease space. Retail space, for instance, saw a 5 percent increase in the number of days it was on the market before being leased, to an average of 260 days. And industrial space now languishes on the market for 218 days, up 4 percent during the month, before being leased.

Boxwood Means cited pessimism among small-business owners for the greater time it takes to lease space. "Business owners' diminished confidence in the economy - and perhaps Washington as well - poses significant near-term hurdles for job growth, the finance sector and small-cap commercial real estate."

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