Small-Cap CRE Asset Prices Accentuate Regional Differences

Though small-cap commercial real estate asset prices have increased substantially since the 2008 financial crisis, the recovery has been geographically uneven, reported Boxwood Means, Stamford, Conn.

“In the wake of the financial crisis, the rising tide of the U.S. economy proverbially lifted all boats to some extent, but not all small-cap commercial real estate markets have equally re-inflated along with it,” said Boxwood Means Principal Randy Fuchs. “Indeed, since the onset of recovery in 2012 there have been wide variances in asset price trajectories across U.S.”

Fuchs noted the western U.S. has posted the best price gains by far. “Powered in part by strong job growth in STEM-related businesses in San Jose, San Francisco and Seattle among other metros, the west has enjoyed a hefty 4.1 percent compound annual growth rate in small-cap commercial real estate prices since bottoming out in 2012,” he said, adding the west has recovered nearly 70 percent of its losses through September 2019. “But, as a result of a severe decline in prices in the wake of the financial crisis​, this region remains 11 percent below its former boom-time peak value at the end of 2007,” he said.

Driven by growth in energy-focused markets including Houston, Tulsa and Oklahoma City and fast-paced employment and population growth in Denver and Dallas, the Southwest region ranked second to the western U.S. with 3.3 percent annual price growth. Small-cap properties in the Southwest have recovered more than 69 percent of their cyclical losses as of September.

The Midwest and Northeast saw the slowest increase in prices during the current upcycle, Fuchs said. “With its high concentration of traditional manufacturing sectors and factory employment that has yet to fully recover since the Great Recession, the Midwest’s small-cap commercial real estate asset prices have increased at a modest 1.5 percent annual growth rate,” he said.

The Northeast’s former peak to current change equals -8.9 percent, Fuchs said. The region’s subpar annual price growth of just 1.1 percent explains the sluggish price rise despite positive contributions from prosperous hubs including New York and Boston. “The fact is, among the 22 New York, New Jersey and Connecticut metros comprising the Northeast, the region’s overall employment growth has barely recouped its total job losses since the financial crisis,” he said.

The Mid-Atlantic states, Pennsylvania, Maryland, West Virginia, Virginia and the Washington, D.C. metroplex houses numerous private, public and government-related businesses that have generated modest returns with low price fluctuation in the context of small-cap real estate prices, earning the Mid-Atlantic region a fourth-best 1.7 percent annual price gain and the lowest annual price volatility. As a result, the region has climbed to within 5 percent of its former peak level and recovered 69.8 percent of its losses–both tops among the six regions, Fuchs said. “It might be somewhat impractical or unrealistic to gauge metro and regional price performance based in part on the degree to which a market has regained parity with its peak value before the financial crisis,” Fuchs said. “That said, knowing the ultimate boundary lines between feast and famine, or where current and projected property values sit between an era’s peak and trough, are valuable guideposts in framing an investment thesis or financing for your next small-balance loan or property acquisition.”