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Based on information in NAR’s Commercial Real Estate Market Trends report one can conclude that small commercial real estate (SCRE) markets (properties less than $2.5 million) are distinctly different from large commercial real estate markets (LCRE), where properties exchange hands for over $2.5 million. [1] NAR has estimated that the commercial market for buildings selling for under $2.5 million could be in the neighborhood of $50 billion annually, compared to the market for large buildings—which has averaged $360 billion and above in recent years.
Property fundamentals also seem to diverge along valuation lines. In 2014 REALTORS® reported that vacancy rates in the SCRE markets were mixed across property types. For apartments, the national average vacancy rate rose to 6.8 percent (compared to rates in the 4.0 percent level for LCRE properties). Office vacancies declined to 14.9 percent (roughly comparable to LCRE markets), while industrial availability rose to 11.6 percent (compared to approximately 9.0 percent for LCRE properties). Retail availability decreased to 12.5 percent (compared to 9.7 for LCRE properties). Overall, the vacancy rates pointed out that in SCRE markets the recovery in leasing activity was slower than in the LCRE markets.
In terms of capital availability, the divergent trends continued. REALTORS® reported that in SCRE markets, the main sources of commercial real estate funding came from local and regional banks. In comparison, the LCRE segment was broadly diversified, with representation from government agencies (Freddie/Fannie), insurance companies, national banks, REITs, commercial mortgage backed securities, private investors and cross-border funds.
LCRE markets appear to focus to a significant degree on central business district office and retail properties as well as large properties in the suburbs. In comparison, REALTORS® reported a significant level of warehouse and suburban office sales.
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