THE BIG PICTURE
INVESTING STRATEGIES
other solid year for the small-balance space, according to a recent Small Balance Advo- cate report. Rents for small-cap warehouse and flex buildings are doing particularly well, with office and retail rents also on the rise, albeit at a more modest pace. Some of the market’s attractiveness can be ascribed to a continued relative lack of new construction projects. The pace of construc- tion in Q2 2015 was at just 40 percent of the long-term quarterly average rate. "It is a bit of a head-scratcher that developers of smaller buildings have not responded to the very tight vacancies that exist in the small- cap domain," Fuchs said. Enthusiasm for development by industry participants seems to be curbed by insuffi- cient rents and the somewhat indeterminate course of the nation’s economic recovery. Rent growth is likely to persist as long as the demand-supply gap persists. LANDS OF OPPORTUNITY Certain areas in California are leading the comeback, while annual returns for selected Florida cities are among the best in the country, including Sarasota and Fort Lauderdale. To some extent, these latter re- gions are “playing from behind,” since they had precipitous losses during the recession. As a result, however, lenders and investors may still find attractively priced assets in some of these markets. In general, large-cap CRE price trends— seen, for example, from the Core Commer- cial (CC) component of Moody’s/
TRANSACTIONS INVOLVING SMALLER COMMERCIAL PROPERTIES ARE ON THE UPSWING.
Where the Action Is
by Lawrence Fassler
ig trophy properties in larger cities have certainly benefited from the re- cent strong real estate market, but last year’s bigger story was about the recent resurgence of smaller commercial properties. Transactions involving assets priced under $5 million were at record levels during 2015, even as higher-priced locales like Manhattan and San Francisco became too pricey for many institutional investors. Sales volumes of small-cap assets—which were up 14.4 percent through the first half of 2015, as compared to 2014—are moving at the fastest clip since at least 2005. B THE SMALL-BALANCE DIFFERENCE The small-balance commercial real estate market behaves a bit differently than that for larger Class A properties. Global investors don’t seem to chase the small-bal- ance market, for one thing. Another differentiator is that the small-balance commercial market tends to move more in tandem with the residential housing space, which has also ticked up as of late. The investor who buys a small-cap property is a different breed from the REITs and pension funds that have been buying up large assets in San Francisco and Manhat- tan, according to George Ratiu, a commer- cial analyst with the National Association of Realtors. The investor in smaller assets
often needs to take out commercial bank loans to purchase a restaurant, a strip mall or warehouse building. While individual properties can sometimes be riskier if they are based on only a few tenants, in other respects the small-balance market seems to exhibit some degree of stability. “The prices in the small-cap CRE (commercial real estate) domain don’t have the same peaks and valleys as the large CRE market,” said Randy Fuchs, principal at Boxwood Means, a research group that surveys trends in smaller commercial properties. SMALL IS BEAUTIFUL? Small-balance commercial real estate is also an increasingly fragmented market. The top 15 small-balance lenders took over 20 percent of sub-$5 million origi- nations during Q2 2015, for example, but those same banks seem to be shedding small-balance real estate loans. “Despite their dominance in the small-balance commercial space, commercial banks face increasing competition for smaller loans, especially from the growing herd of alter- native and non-bank lenders,” said Fuchs. “The trend of small business real estate loans within bank portfolios is declining— and seemingly irreversibly so.” Record-low vacancies and recurring gains in leasing demand would seem to assure an-
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Lawrence Fassler, an attorney and real estate investor, is corporate counsel of RealtyShares, a leading real estate investment marketplace that places equity
investments through North Capital Private Securities Corporation; a registered Securities broker-dealer; and member of FINRA/SIPC. RealtyShares as an institution does not advise on any legal issues, and this article is for general information only and does not represent professional legal advice. Contact Fassler at lawrence@realtyshares.com.
46 | think realty magazine | may :: june 2016
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