Commercial Real Estate Update

Here is a quick commercial update from our friends at Boxwood Means. While Texas real estate including commercial has held up relatively well, that’s not the case for the rest of the country. As you can see rents in commercial real estate are dropping due to lack of demand. In my opinion until we have a change of policy in the White House demand will remain low due to the uncertainty in the economy and continued over-regulation.

Higher unemployment, weaker consumer sentiment and stalled small business activity deteriorated small-cap commercial real estate fundamentals during the second quarter, reported Boxwood Means Inc., Stamford Conn. Boxwood Means’ Mercury Report, National & Regional Trends Update: U.S. Small-Cap Real Estate Market, showed small-cap real estate rents for properties $5 million and below falling in all property types.

 “National rents declined modestly in all sectors during June and, in the absence of stronger leasing demand from Main Street businesses, we don’t anticipate the space markets to rev up any time soon,” said Randy Fuchs, principal of Boxwood Means. “The fact is that weak housing markets, high unemployment and stingy consumers are conspiring to restrain consumption and the economic growth that would lead to robust building acquisitions and facility expansions.”

Fuchs said the largest and smallest firms suffered deep net job losses during the recent recession, but “the former group [250 employees or more] added net job gains at a much faster and prolonged rate than the latter after the recession ended.” In the past year, from June 2010, small-cap industrial rents fell 4.46 percent, office dropped 4.06 percent and retail dipped by 3.82 percent. Strip centers dropped most, 5.36 percent, while shopping centers fell 5.09 percent. From May to June this year, office property rents dropped 29 basis points and industrial and retail properties fell 25 bps each. Strip centers again fell most by 48 bps and shopping centers had a 46 bp drop.

Fuchs said the recession–longest since the Great Depression–imposed greater hardship on the smallest firms relative to larger-sized ones because it “delayed the resurgence of the small business sector to a greater degree than larger firms.” However, he also noted that while small-cap operating fundamentals were “lackluster on an aggregate national level during the second quarter,” more secondary metro markets posted positive rent growth as other metros “eked out sales price increases.” Small-cap rents gained in 32 of nearly 100 retail markets during the second quarter, up from 24 in the first quarter. New Haven, Conn., Nashville, Tenn., and Knoxville, Tenn., led gains. Rents also increased in 19 office markets compared with 13, led by Greenville, S.C., Toledo, Ohio, and Birmingham, Ala.

Despite mostly larger secondary metros making process, “the evidence suggests that the CRE recovery has yet to extend beyond a handful of gateway cities in any meaningful way, nor has it materially affected Main Street market dynamics,” Fuchs said. “Some small-cap market leadership has emerged in stronger secondary markets, but only time will bind many others to heal their outcomes.

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