Small-Cap CRE: Smaller Markets Outperform Larger Ones

As the national economy rebounded last year, smaller markets outperformed larger markets in the small-cap space, reported Boxwood Means LLC, Stamford, Conn.

“With general expectations that neither inflation nor the pandemic will create much drag on economic growth in 2022, this shifting balance in market power appears to have legs,” said Boxwood Means Principal and Co-Founder Randy Fuchs.

Fuchs said “exceptional” price growth permeated all corners of the real estate world last year. For example, the S&P/Case-Shiller U.S. National Home Price Index–which has averaged a 4.2 percent annual increase since 1987–reached a 20 percent gain last August. And Real Capital Analytics, New York, reported CRE sales and pricing both hit record levels in November. Fuchs said Boxwood’s National Small Commercial Price Index, which tracks CRE property sales under $5 million in 160 metros, accelerated through much of last year.

The Boxwood Small Commercial Price Index compiled double-digit growth over four consecutive months in 2021, reaching a record 13.2 percent average annual growth rate during October–the highest 12-month return in at least 15 years. With record property sales of $243 billion through October–more than 40 percent above 2020’s pace–“it’s no wonder that prices have skyrocketed,” Fuchs said.

Fuchs noted a significant commercial real estate market reversal along with those high-altitude prices. “After trailing for years, small-cap prices in secondary and tertiary markets outstripped the rate of growth by the six biggest metro areas for virtually all of 2021,” he said. Smaller markets recorded a 13.8 percent 12-month return in the latest available period while the six largest population centers produced a 12.3 percent gain. Top secondary and tertiary market performers included Wilmington, Del., Hartford, Conn., Springfield, Mass. and New Haven, Conn.

“Clearly, as the economy and commercial real estate space markets roared back this past year, both big- and small-time investors leaned heavily into the smaller metro areas where the risk-reward profile for assets had markedly improved,” Fuchs said. “Small-balance commercial lenders will do well to take heed of this change in market leadership,” Fuchs noted.