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About Us > In the News > Small Retail Property Rent Drops Steeper than Larger Property Declines (04/14/09)

Rents at Small-Cap Properties Continue Falling
Tuesday, 16 June 2009
Commercial Real Estate Direct Staff Report

Rents at small industrial and office properties continued to fall last month, according to Boxwood Means Inc.

But the rate of decline has not increased, according to the Stamford, Conn., research company that specializes in small-capitalization properties. And that could signal that the market might be close to reaching its cyclical bottom.

Rents at office properties with less than 50,000 square feet, for instance, fell by 27 basis points in May to $18.21/sf, while at industrial properties, they fell 61 bp to $7.63/sf. Those rates of decline are similar to the drops in previous months. On a relative basis, that's good news.

Nonetheless, rents have fallen at industrial properties for 18 months straight and at office properties for 12 months. Small office properties generally do not rely on the financial or professional services sectors for tenants.

Larger-cap properties, meanwhile, have suffered greater declines in rent. According to Reis Inc., national office rents fell by 4.1 percent in the first quarter, to $24.08/sf, from their peak in the second quarter of 2008. During the same period, rents at small-cap companies fell by only 1.67 percent, to $18.31/sf.

Boxwood Means compiles property-level operating and sales data on small-cap properties through a partnership with LoopNet Inc. It has found a strong correlation between the performance of the residential housing market and small-cap commercial properties and noted that the residential market has been showing signs of stabilization of late. The same could be said of the small-cap commercial market.

House prices had hit their nadir months earlier and have since bounced slightly. Small-cap commercial properties "might also be finding a market floor," Boxwood Means said, noting that such properties are "highly dependent" on neighborhood-based businesses and residential communities.

But the company found a wide disparity among geographic regions, with the Southeast being especially hard hit and the Northeast relatively unscathed. Those trends mirror the residential housing market.

The small-cap property sector isn't immune to the ongoing capital-markets squeeze. But most properties have managed to avoid potential foreclosure as a result of maturity defaults because they mostly rely on financing from small and regional banks.

"Financing availability has been a differentiator that has propped up the small-cap sector," Boxwood Means said. The lack of financing, prompted by the shutdown of the CMBS market and a substantial pullback by other traditional lenders, such as life insurers, has put the larger-cap market into a tizzy.

Comments? Call Orest Mandzy at (215) 504-2860, Ext. 211.

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