Tenant demand for small commercial properties dips sharply

Demand for space in small U.S. commercial real estate buildings has plummeted in 2019, a worrisome sign for the small-cap market, according to tracking company Boxwood Means.

Year to date through this past September, companies are absorbing space in properties of less than 50,000 square feet at the slowest rate since the financial crisis, Boxwood Means said in its third-quarter report.

“Main Street space and investment-market fundamentals are relatively sound, but the third-quarter trends reveal that the economic underpinnings of this long CRE bull market have loosened and frayed,” Randy Fuchs, principal of Boxwood Means, told Scotsman Guide News on Friday.

In the third quarter of this year, aggregate net absorption was 3.3 million square feet, 92% less than the same quarter a year earlier. Year to date through September 2019, net absorption in small retail, industrial and office properties totaled 24.3 million square feet, down 75% compared to the first three quarters of 2018.

The industrial sector fared the worst in terms of space demand, posting a negative net absorption of 2.9 million square feet during the past quarter. The gain in office occupancy was essentially flat at 317,000 square feet. And the retail sector posted net absorption of 5.9 million square feet. Although that figure was most among the asset classes tracked by Boxwood Means, the net absorption of retail space was down 68% year over year.

Strong fundamentals

Despite the lesser demand, rents for small properties continue to rise and sales prices for properties valued at less than $5 million have picked up, Boxwood Means reported. The aggregate vacancy rate ticked up only 10 basis points year over year in third-quarter 2019, remaining low at 4.3%.

Deal volume for properties of less than $5 million has slipped, however. This past July, asset sales totaled $8.9 billion, down 12.9% year over year. Year to date through this past July, asset sales declined by about 9%, Boxwood Means reported.

Through the first two quarters of this year, mortgage volume for these properties also was running behind the pace of the corresponding period in 2018. In second-quarter 2019, loan volume for assets of less than $5 million was $51.1 billion, which was about 10% lower year over year, Boxwood Means noted.


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