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NATIONAL & REGIONAL TRENDS UPDATE
U.S. SMALL-CAP REAL ESTATE MARKET
MARCH 2011
May 2, 2011
Feeble remains the watchword for small-cap CRE markets in the aggregate. Modest
rent declines in March resulted in average first quarter national losses of roughly
1% and between 4%-5% across all property types over the last 12 months. That
being said, selected markets have begun to percolate: Chattanooga’s positive
industrial and retail rent growth (each 2.7%) was best in the nation during 1Q;
Baltimore was near the top of the charts for industrial (1.7%) and office (0.6%); and
Greenville was among the outperformers for shopping center rent growth (2.7%)
and office (0.6%).
Overall, small-cap retail and shopping centers appear to be rebounding quicker
than other sectors. Twenty-seven shopping center markets and 24 retail markets
posted positive rent growth during 1Q. Also, 20 industrial markets recorded rent
gains but only 13 office markets – the sector whose prosperity is most reliant on
employment gains – were in the black.
Boxwood’s Days on Market index remains at record-high levels but stabilized in
March. On average across property types, lease-up time consumes 6-8 months for
commercial space in small properties; office has the shortest duration at 203 days
while shopping center space takes on average 250 days (see the trends on Page 8).
Marketing time among individual metros varies widely, however: e.g., industrial
space in Wichita leases up on average in only 93 days but takes over a year in New
Haven; and tenants take down office leases in Kansas City in 107 days on average
compared with a whopping 421 in Fort Pierce.
Summary
2
First quarter GDP figures foretell possible lower economic growth for the second
half of the year. U.S. real GDP rose only 1.8% after fourth quarter’s more
encouraging 3.1%. Declines in government expenditures and construction
outweighed gains in business investment and inventory growth. This may be a
temporary setback on the road to a strong recovery; but frankly, it seems that
economic growth may be sluggish without contributions from the housing market
and associated investment activity. So far it’s been a ‘property-less’ recovery, a
situation that stands in sharp contrast with housing’s key role in economic
recoveries during past recessions.
However, there is no doubt that the U.S. employment picture on Main Street has
brightened a bit: Small businesses with 50 or fewer employees added 102,000 jobs
in March after contributing 96,000 in February according to ADP. The trend is
certainly positive as March’s total exceeds by more than 40% the job gains posted
six months ago. But far greater sums of jobs will be needed for small-cap markets
to rebound sharply.
Summary – Cont’d
3
Price trends in housing and small-cap CRE markets continue to paint a similar
downbeat picture (see the graph on Page 9). The S&P/Case-Shiller composite index
of housing prices in 20 large cities dropped 1.1% during February and, after 7
consecutive months of decline, is on the brink of a double dip coincident with its
April 2009 nadir. The SCPI-20 (Small-Cap Price Index) that tracks sales of
commercial properties under $5 million in the same large markets slid a sizable
1.7% in the corresponding period and, at 77.01, sits at a new low. It’s evident that
distressed real estate weighs heavily on prices and will likely continue to do so for
the greater part of the year.
Nationally, small-cap CRE prices also decreased. The SCPI-100 fell 1.3% in February
to 87.1, reversing the modest 0.25% increase of the previous month. Meanwhile,
the Moody’s/REAL CPPI comprising primarily larger assets above $5 million slid a
hefty 3.3% and has now declined for three consecutive months. The SCPI-100 is
down 20.1% from its 2007 peak, less than half the 44.6% drop in CPPI over the
same timeframe (see the comparative trends on Page 10). Some of the CPPI’s
higher volatility is sample-related, i.e., roughly 29% of the repeat-sales transactions
posted in February involved distressed assets according to Moody’s.
Summary – Cont’d
4
Summary – Cont’d
5
The Great Recession’s severe damage to CRE markets may have wrought a long
winter of discontent, but we have now transitioned beyond that dreadful season.
We’re well into the next phase with: cathartic-like sales of distressed properties that
won’t likely crest until the second half of this year; and a positive, albeit sluggish
revival on Main Street that reflects the moderate pace of U.S. economic growth.
This, coupled with the arrival of higher rents last quarter in assorted small-cap
markets signals stronger fundamentals and better things to come.
National Rent Levels and Changes
6
Source: Boxwood Means, Inc.; LoopNet, Inc.
Property Mar. Feb. 1-Mo. 3-Mo. 12-Mo.
Type Chg. Chg. Chg.
Industrial $6.70 $6.72 -0.35% -1.01% -5.05%
Flex $8.30 $8.33 -0.33% -1.13% -5.05%
Manufacturing $7.58 $7.60 -0.34% -1.10% -5.28%
Warehouse $7.01 $7.03 -0.27% -0.92% -5.05%
Office $16.67 $16.73 -0.33% -1.08% -4.22%
Medical Office $18.35 $18.39 -0.21% -0.69% -2.66%
Retail $16.77 $16.83 -0.36% -1.03% -4.11%
Street Retail $16.69 $16.74 -0.29% -0.97% -4.02%
Free Standing Bldg. $15.07 $15.12 -0.29% -0.91% -3.27%
Other Retail $16.28 $16.33 -0.29% -0.80% -3.97%
Shopping Centers $16.66 $16.73 -0.45% -1.32% -4.90%
Strip Centers $15.64 $15.72 -0.50% -1.49% -5.29%
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
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
145
165
185
205
225
245
265
5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3
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.; S&P
Small-Cap versus Residential Housing Price Trends
9
60
70
80
90
100
110
1202
00
6.0
7
20
06
.09
20
06
.11
20
07
.01
20
07
.03
20
07
.05
20
07
.07
20
07
.09
20
07
.11
20
08
.01
20
08
.03
20
08
.05
20
08
.07
20
08
.09
20
08
.11
20
09
.01
20
09
.03
20
09
.05
20
09
.07
20
09
.09
20
09
.11
20
10
.01
20
10
.03
20
10
.05
20
10
.07
20
10
.09
20
10
.11
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.; Moody’s
Small versus Large Cap Property Price Trends
10
60
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
1
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
11
70
80
90
100
110
120
20
06
.07
20
06
.09
20
06
.11
20
07
.01
20
07
.03
20
07
.05
20
07
.07
20
07
.09
20
07
.11
20
08
.01
20
08
.03
20
08
.05
20
08
.07
20
08
.09
20
08
.11
20
09
.01
20
09
.03
20
09
.05
20
09
.07
20
09
.09
20
09
.11
20
10
.01
20
10
.03
20
10
.05
20
10
.07
20
10
.09
20
10
.11
20
11
.01
Ind
ex:
July
20
06
= 1
00
Sales Price Trends: 20 Largest Metros vs. Remainder
Boxwood SCPI-20 Boxwood SCPI-80
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
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
-15.1%
-11.4%
-9.7%
-8.6%
-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
2007 2008 2009 2010 2011
Monthly R
ent C
hange
Flex Manufacturing Warehouse Industrial
Rent Conditions – Selected Industrial Markets
Source: Boxwood Means, Inc.; LoopNet, Inc.
15
2.75
1.72
1.67
1.42
-1.01
-2.86
-2.95
-3.24
-5.74
-8 -6 -4 -2 0 2 4
Chattanooga
So. NJ
Baltimore
Milwaukee
U.S. Avg.
Orlando
Riverside-San Bern.
Grand Rapids
Las Vegas
Best
Wors
t
Industrial Rents
Worst/Best Performing Markets, 1Q 2011 Pct. Change
Source: Boxwood Means, Inc.; LoopNet, Inc.
Leasing Conditions – Selected Industrial Markets
16
375
371
361
346
218
133
131
126
93
0 100 200 300 400
New Haven
Boston
Jacksonville
West Palm Beach
U.S. Avg.
Denver
Orange Cty
Memphis
Wichita
Wors
tBest
Days on Market - Closed Industrial Leases
Worst/Best Performing Markets, as of February
National Retail Rent Trends
Source: Boxwood Means, Inc.; LoopNet, Inc.
17
-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
2007 2008 2009 2010 2011
Monthly R
ent C
hange
Free-Standing Retail Street Retail Other Retail Retail
Rent Conditions – Selected Retail Markets
Source: Boxwood Means, Inc.; LoopNet, Inc.
18
2.74
1.45
1.21
1.13
-1.03
-3.17
-3.56
-3.92
-4.61
-5 -4 -3 -2 -1 0 1 2 3 4
Chattanooga
Modesto
Fort Wayne
Appleton
U.S. Avg.
Toledo
Grand Rapids
Las Vegas
Fort Myers
Best
Wors
t
Retail Rents
Worst/Best Performing Markets, 1Q 2011 Pct. Change
Source: Boxwood Means, Inc.; LoopNet, Inc.
Leasing Conditions – Selected Retail Markets
19
434
391
357
350
225
147
147
140
113
0 100 200 300 400 500
Des Moines
Fresno
Modesto
Oklahoma City
U.S. Avg.
New York
Jacksonville
Lakeland
Springfield, IL
Wors
tBest
Days on Market - Closed Retail Leases
Worst/Best Performing Markets, as of February
National Shopping Center Rent Trends
Source: Boxwood Means, Inc.; LoopNet, Inc.
20
-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
2007 2008 2009 2010 2011
Monthly R
ent C
hange
Shopping Center Strip Center
Rent Conditions – Selected Shopping Center Markets
Source: Boxwood Means, Inc.; LoopNet, Inc.
21
2.75
2.72
2.34
2.03
-1.32
-3.39
-3.89
-3.92
-4.45
-6 -5 -4 -3 -2 -1 0 1 2 3 4
Greenville
Appleton
Boise City
Albuquerque
U.S. Avg.
Newark
Rochester, NY
Las Vegas
Tucson
Best
Wors
t
Shopping Center Rents
Worst/Best Performing Markets, 1Q 2011 Pct. Change
Source: Boxwood Means, Inc.; LoopNet, Inc.
Leasing Conditions – Selected Shopping Center Markets
22
411
398
391
380
250
145
138
136
126
0 100 200 300 400 500
Memphis
Tulsa
Cleveland
Hartford
U.S. Avg.
Wash. DC
Kansas City
Albuquerque
Pittsburgh
Wors
tBest
Days on Market - Closed Shopping Center Leases
Worst/Best Performing Markets, as of February
National Office Rent Trends
Source: Boxwood Means, Inc.; LoopNet, Inc.
23
-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
2007 2008 2009 2010 2011
Monthly R
ent C
hange
Office Medical Office
Rent Conditions – Selected Office Markets
Source: Boxwood Means, Inc.; LoopNet, Inc.
24
1.14
0.57
0.55
0.49
-1.08
-3.12
-3.25
-3.50
-3.87
-5 -4 -3 -2 -1 0 1 2
Modesto
Baltimore
Greenville
Pittsburgh
U.S. Avg.
Phoenix
Riverside-San Bern.
Las Vegas
Orange Cty.
Best
Wors
t
Office Rents
Worst/Best Performing Markets, 1Q 2011 Pct. Change
Source: Boxwood Means, Inc.; LoopNet, Inc.
Leasing Conditions – Selected Office Markets
25
421
378
375
343
203
122
118
115
107
0 100 200 300 400
Fort Pierce
New Haven
Stockton
Memphis
U.S. Avg.
Richmond
Tacoma
Jersey City
Kansas City
Wors
tBest
Days on Market - Closed Office Leases
Worst/Best Performing Markets, as of February
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.
*****
Boxwood Means, Inc. is a Stamford, CT-based real estate research firm providing quantitatively-oriented
solutions for the investment, valuation and risk management needs of a diverse base of real estate, financial
institutions and investment firms in the U.S. and Canada. Boxwood owns and operates SmallBalance.com, a
subscription-based web site that delivers analytical reports to participants in the small commercial property and
loan markets.
Boxwood Means, Inc. – © 2011 All Rights Reserved
Tel: 203-653-4100
Email: [email protected]