Leasing Demand Rally Encourages Small-Cap CRE Investors

A fourth-quarter rally in small-cap commercial real estate leasing demand improved the outlook for small-balance lenders and investors, reported Boxwood Means, Stamford, Conn.

“After 11 months of small business disruption and closures caused by the pandemic, a fourth-quarter turnaround in small-cap CRE space demand may signal renewed owner confidence in the small business economy,” said Boxwood Means Principal Randy Fuchs.

Boxwood Means defines small-cap CRE space as buildings under 50,000 square feet.

Fuchs noted recent National Federation of Independent Business research found small business owners do not anticipate better business conditions over the next six months. “But the recent reality is that small firms are hiring workers and signing leases,” he said. “And the new administration’s commitment to federal COVID relief and stimulus and plans to revive the economy and boost vaccine manufacture and distribution will all have a positive impact for the Main Street economy and commercial real estate.”

Fuchs said absorption across the small-cap industrial, retail and office sectors “sprang into positive territory” during the fourth quarter, halting a three consecutive quarter slide in demand not seen since 2009.

Overall occupancies gained 12.1 net million square feet, led by industrial (12.2 million square feet) and retail (5.2 million square feet). The industrial sector gains were the greatest seen since third-quarter 2018, boosted by an uptick in transportation, warehousing and manufacturing employment at year end.

“The strong industrial demand bent the curve downward on the fourth-quarter average national industrial vacancy rate as well as the overall availability rate,” Fuchs said.

Job gains in retail trade also helped stabilize retail space fundamentals in small-cap properties. The average vacancy rate held steady at 4.6 percent and total availabilities declined slightly to 6.1 percent, the report said.

But the struggling office sector suffered another setback with net occupancy losses equaling 5.2 million square feet, culminating in a total net occupancy loss of 31.7 million square feet for the year, the biggest annual deficit since at least 2006. When sublease office space is combined with direct space for lease, the total office availability rate of 9.6 percent is the highest seen in four years. “Nationally, the office sector is clearly shaping up to be the laggard, behind retail, in leasing velocity,” Fuchs said.

All things considered, the small-cap CRE space and investment markets have proven to be “surprisingly resilient,” Fuchs said. “That said, COVID cases and deaths are soaring since the 2020 holiday season and, coupled with the tardy rollout of the vaccine to date, it’s anybody’s guess what the trajectory of Main Street economic recovery and growth will look like in the immediate months ahead and as the new administration in Washington, D.C gets to work.”