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Small-Cap Properties Saw 3.2 Percent Drop in Value Last Year
Friday, 02 March 2012
Commercial Real Estate Direct Staff Report


Commercial properties with relatively small capitalizations saw a 3.2 percent drop in value last year, according to an index by Boxwood Means Inc.

That contrasts with a relatively flat 0.2 percent increase in an index, by CoStar Group, that tracks all properties. A CoStar index that tracks what it considers investment-grade properties was up 3.4 percent for the year.

Boxwood Means, a Stamford, Conn., research company that tracks rents, vacancies and sales of properties valued at $5 million or less, blamed the weakness in the small-cap market on the "persistently weak residential housing market and fragile economy." It previously found a close correlation between the small-cap commercial property market, the residential housing market, general economic conditions and unemployment levels. Valuations on large-cap properties, meanwhile, are influenced far more by property-level cash flows as well as real estate and capital market cycles.

The company tracks values for small-cap properties through two Small-Cap Property Indices, or SCPI (pronounced Skippy.) An index that tracks property values in the country's top-20 markets saw a 5.2 percent year-over-year decline, while an index that tracks the top-80 markets saw a 2.2 percent drop.

"Despite conventional wisdom, it is the secondary and tertiary markets that have proven more stable over time," Boxwood Means said.

It pointed out that the SCPI-80 has fallen 18 percent since it peaked in 2008, while the SCPI-20 has fallen 32.8 percent, closely mirroring CoStar's composite property index, which is down 31.8 percent from its peak as of last November.

Despite the latest year's relatively weak performance, small-cap properties have been solid performers. That jibes with recent findings, by Nomura Securities, that loans against small properties have outperformed, in terms of delinquency, larger-balance loans.

Boxwood Means noted that small-cap properties in certain markets have woefully underperformed the nation as a whole. It said properties in certain cities it tracks, such as Reno, Nev., Rockford, Ill., and Fort Myers, Fla., saw pricing drops of 15 percent to 40 percent last year. But other markets outperformed. Those include Rochester, N.Y., which saw a 15.1 percent pricing increase, and Dayton, Ohio, with a 9.3 percent gain. It said that a total of 59 of the 80 markets it tracks saw pricing gains last year.

Looking forward, the company said it registered $3.8 billion of small-cap property sales in last year's fourth quarter, for a 4.7 percent gain from the three months ended November. That would leave 2011 with a total of $46.1 billion of sales, up 25 percent from the year before.

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