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NATIONAL & REGIONAL TRENDS UPDATE
U.S. SMALL-CAP REAL ESTATE MARKET
April 2011
June 1, 2011
Small-cap market fundamentals continued to show some modest improvement in
April. We’re not yet talking positive national rent growth, of course. Neither are we
suggesting a major uptick in Main Street leasing demand. But a gradual, almost
imperceptible monthly advance – or market creep – is slowly taking root across the
U.S. landscape.
Rents appear to be on the mend. Industrial rents, which declined a sizable 8.5% for
the previous 12 months ending with April 2010, were off only 0.29 (29 basis
points) this past April; and with a string of smaller losses for six consecutive
months, the12-month loss now amounts to only 5.0%. Rent losses for retail and
shopping center properties also narrowed, and office rent changes were flat. See
the rent trends on Page 7.
The improvement in industrial rents finds some support in the leasing market.
Boxwood’s national Days on Market index for the industrial sector declined by 3%
or 6 days in April to an average of 212 days to lease up space – the largest decline
since we began tracking this metric two years ago. This period’s reversal of a
trailing three-month increase in days on market falls far short of a trend, but it
does appear that demand for small warehouses, flex and light industrial space
among other uses is modestly expanding at this point in the cycle. Wichita is the
prime example, leading the nation with an industrial index of only 89 days on
market.
Summary
2
Days on market stabilized for other small-cap property types as well. Marketing
time for shopping centers was unchanged at an average of 250 days versus the
previous month, retail was also flat at 223 days, and office declined by 3 days to
200 on average. New York pops up among best performers for both office (105
days) and retail (133). See Page 8 for the national days on market trends.
The second revision of first-quarter GDP was unchanged at 1.8%, a pace of growth
that raises more questions than answers about the direction of the economy.
Clearly, economic vigor is constrained by lower government spending and the
troubled housing market. We continue to emphasize the importance of the
housing market to the strength and rejuvenation of the small-cap CRE market.
Recent reports indicate that, in the absence of strong numbers of buyers, housing
remains under significant pressure: Existing home sales dipped in April, while
pending existing home sales as well as housing starts each tumbled by more than
10%. On top of that, the S&P/Case-Shiller Index dropped to a new low in March
reaching 2002 levels. These housing numbers offer little encouragement for the
remainder of the year given that we’re already in the midst of the prime home
buying season.
Summary – Cont’d
3
Small business employment, a key driver of U.S. economic growth as well as
demand in the small-cap CRE space, rose by 84,000 jobs in April. This sum,
produced by firms with 50 or fewer employees, is down from the 102,000 jobs
created in March and 96,000 in February according to ADP. That said, the April
figure exceeds by 75% the total new jobs created by small firms 12 months ago –
thus suggesting that forward momentum will be maintained through the second
half of the year.
Economic uncertainties, sluggish Main Street leasing condition and an uptick in
distressed sales are still producing headwinds for the small-cap investment market.
Small-cap sales prices scratched new lows in March, with our preliminary SCPI-100
index dipping by 1.0% to 86.02 after a (revised) 0.6% loss in February. This
benchmark of small commercial property sales under $5 million has now declined
for four months in a row, amounting to losses of 3.7% and 10.8% over the
corresponding 12- and 24-month periods, respectively.
Summary – Cont’d
4
Summary – Cont’d
5
By comparison, sales prices in the larger CRE market are swooning. Moody’s
reports that the CPPI comprising sales of properties concentrated over $5 million
plummeted 4.2% in March -- the most severe slide since a 5.1% loss in July, 2009.
Moody’s indicates that distressed sales are mounting in its pool of repeat-sales,
rising to a third of the entire period’s transactions. Nevertheless, sales prices of
trophy properties in high-profile, coastal cities are bucking the downdraft. See Page
9 for the comparative sales price trends.
Small-cap prices in bigger metro areas fared better than the nation as a whole. The
SCPI-20 for some of the 20 bigger metro areas eased 0.7% in March’s first estimate.
This particular index, which is historically more volatile than the SCPI-100, is down
8.9% over 12 months ending March and 20.9% over 24. Meanwhile, SCPI-20’s
trajectory is hauntingly similar to the S&P/Case-Shiller Index for the same metros
(see Page 11). Finally, the SCPI-80, representing the balance of mostly smaller
markets, slumped by 1.2% on a preliminary basis, more than double the loss of the
prior month and perhaps signaling higher levels of distress surfacing in smaller
metro areas. (see Pg. 10 for the trend.) To this point, however, these markets as a
group have retained incomparable stability, down merely 1.1% over the last year
and 5.3% over two years.
National Rent Levels and Changes
6
Source: Boxwood Means, Inc.; LoopNet, Inc.
Property Apr. Mar. 1-Mo. 3-Mo. 12-Mo.
Type Chg. Chg. Chg.
Industrial $6.68 $6.70 -0.29% -0.97% -4.97%
Flex $8.28 $8.30 -0.31% -1.03% -4.91%
Manufacturing $7.55 $7.58 -0.32% -1.02% -4.98%
Warehouse $6.99 $7.01 -0.28% -0.89% -4.73%
Office $16.62 $16.67 -0.34% -1.05% -4.14%
Medical Office $18.31 $18.35 -0.22% -0.68% -2.65%
Retail $16.72 $16.77 -0.30% -1.02% -4.01%
Street Retail $16.65 $16.69 -0.26% -0.88% -3.88%
Free Standing Bldg. $15.04 $15.07 -0.24% -0.83% -3.21%
Other Retail $16.24 $16.28 -0.27% -0.84% -3.80%
Shopping Centers $16.59 $16.66 -0.43% -1.32% -4.95%
Strip Centers $15.57 $15.64 -0.47% -1.47% -5.25%
National Rent Trends
Source: Boxwood Means, Inc.; LoopNet, Inc.
7
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4
2007 2008 2009 2010 2011
Monthly R
ent C
hange
Industrial Office Retail Shopping Center
Source: Boxwood Means, Inc.; LoopNet, Inc.
Days on Market Trends
8
150
170
190
210
230
250
270
5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4
2009 2010 2011
Days on Market Trend - U.S. Averages
Leases from Market Availability to Closing
Shopping Centers Retail Office Industrial
Source: Boxwood Means, Inc.; Moody’s
Small versus Large Cap Property Price Trends
9
50
60
70
80
90
100
110
1202
00
6.0
7
20
06
.10
20
07
.01
20
07
.04
20
07
.07
20
07
.10
20
08
.01
20
08
.04
20
08
.07
20
08
.10
20
09
.01
20
09
.04
20
09
.07
20
09
.10
20
10
.01
20
10
.04
20
10
.07
20
10
.10
20
11
.01
Ind
ex:
July
20
06
= 1
00
National CRE Sales Price Trend Comparison
Boxwood SCPI-100 Moody's/REAL CPPI
Source: Boxwood Means, Inc.
Small-Cap Comparison: Larger vs. Smaller Metros
10
70
80
90
100
110
1202
00
6.0
72
00
6.0
92
00
6.1
12
00
7.0
12
00
7.0
32
00
7.0
52
00
7.0
72
00
7.0
92
00
7.1
12
00
8.0
12
00
8.0
32
00
8.0
52
00
8.0
72
00
8.0
92
00
8.1
12
00
9.0
12
00
9.0
32
00
9.0
52
00
9.0
72
00
9.0
92
00
9.1
12
01
0.0
12
01
0.0
32
01
0.0
52
01
0.0
72
01
0.0
92
01
0.1
12
01
1.0
12
01
1.0
3
Ind
ex:
July
20
06
= 1
00
Sales Price Trends: 20 Largest Metros vs. Balance
Boxwood SCPI-20 Boxwood SCPI-80
Source: Boxwood Means, Inc.; S&P
Small-Cap versus Residential Housing Price Trends
11
60
70
80
90
100
110
1202
00
6.0
7
20
06
.1
20
07
.01
20
07
.04
20
07
.07
20
07
.1
20
08
.01
20
08
.04
20
08
.07
20
08
.1
20
09
.01
20
09
.04
20
09
.07
20
09
.1
20
10
.01
20
10
.04
20
10
.07
20
10
.1
20
11
.01
Ind
ex:
July
20
06
= 1
00
20 Largest Metros: Price Trends for Small-Cap CRE vs. Housing
Boxwood SCPI-20 S&P/Case-Shiller-20
Source: Boxwood Means, Inc.; LoopNet, Inc.
Asking Sales Price Trends
12
-2.0%
-1.6%
-1.2%
-0.8%
-0.4%
0.0%1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4
2007 2008 2009 2010 2011
Monthly P
rice C
hange
Industrial Office Retail Shopping Centers
Source: Boxwood Means, Inc.; LoopNet, Inc.
Change in Asking Sales Prices – Last 12 Months
13
-14.4%
-10.7%
-9.3%
-10.1%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
Industrial Retail Office Shopping Centers
12-M
onth C
hg.
National Industrial Rent Trends
Source: Boxwood Means, Inc.; LoopNet, Inc.
14
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4
2007 2008 2009 2010 2011
Monthly R
ent C
hange
Flex Manufacturing Warehouse Industrial
Source: Boxwood Means, Inc.; LoopNet, Inc.
Leasing Conditions – Selected Industrial Markets
15
353
344
314
312
212
133
132
130
89
0 100 200 300 400
Boston
Cincinnati
Bakersfield
West Palm Beach
U.S. Avg.
Orange Cty.
Los Angeles
Tucson
Wichita
Wors
tBest
Days on Market - Closed Industrial Leases
Worst/Best Performing Markets, as of April
National Retail Rent Trends
Source: Boxwood Means, Inc.; LoopNet, Inc.
16
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4
2007 2008 2009 2010 2011
Monthly R
ent C
hange
Free-Standing Retail Street Retail Other Retail Retail
Source: Boxwood Means, Inc.; LoopNet, Inc.
Leasing Conditions – Selected Retail Markets
17
400
388
370
343
223
141
140
133
107
0 100 200 300 400 500
Modesto
Des Moines
Rochester, NY
Fort Worth
U.S. Avg.
San Francisco
So. NJ
New York
Lakeland-Winter Haven
Wors
tBest
Days on Market - Closed Retail Leases
Worst/Best Performing Markets, as of April
National Shopping Center Rent Trends
Source: Boxwood Means, Inc.; LoopNet, Inc.
18
-0.6%
-0.5%
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4
2007 2008 2009 2010 2011
Monthly R
ent C
hange
Shopping Center Strip Center
Source: Boxwood Means, Inc.; LoopNet, Inc.
Leasing Conditions – Selected Shopping Center Markets
19
411
400
391
389
250
135
123
122
117
0 100 200 300 400 500
Memphis
Modesto
Cleveland
Reno
U.S. Avg.
Pittsburgh
Kansas City
Lakeland-Winter Haven
Albuquerque
Wors
tBest
Days on Market - Closed Shopping Center Leases
Worst/Best Performing Markets, as of April
National Office Rent Trends
Source: Boxwood Means, Inc.; LoopNet, Inc.
20
-0.6%
-0.5%
-0.4%
-0.3%
-0.2%
-0.1%
0.0%
0.1%
0.2%
0.3%1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4 5 6 7 8 9
10
11
12 1 2 3 4
2007 2008 2009 2010 2011
Monthly R
ent C
hange
Office Medical Office
Source: Boxwood Means, Inc.; LoopNet, Inc.
Leasing Conditions – Selected Office Markets
21
337
331
324
318
200
114
113
105
104
0 100 200 300 400
New Haven
Dayton
Louisville
Memphis
U.S. Avg.
Corpus Christi
McAllen-Edinburg
New York
Shreveport
Wors
tBest
Days on Market - Closed Office Leases
Worst/Best Performing Markets, as of April
This National and Regional Trends Update is a complimentary monthly publication on the small
commercial property market from Boxwood Means, Inc.
At SmallBalance.com, Boxwood offers fee-based Mercury Reports with more detailed information
on submarket conditions for small-cap buildings below 50,000 sq. ft. Mercury Reports, the
industry’s sole source of information on this hybrid asset class, are user-driven and provide rent
and sales listings, vacancy rates, and trends corresponding to a subject asset’s location along
with street maps and aerial photo imagery.
On SmallBalance.com, Mercury Reports are complemented by VALPRO, Boxwood’s automated
valuation model that generates instant market value estimates for small commercial properties as
well as Mercury PRO, a report that combines the content of VALPRO and the Mercury Report.
Our fee-based reports are employed by lenders, investors and real estate services firms for
collateral evaluations, as well as during loan origination and underwriting, valuation support,
acquisition due diligence, loan and portfolio credit reviews, and portfolio sales.
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