Small Commercial Real Estate Market

Based on information for cap rates in NAR’s Commercial Real Estate Market Trends report one can conclude that the small commercial real estate (SCRE) market for properties less than $2.5 million is distinctly different from the large commercial real estate market (LCRE).  [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 totaled $438 Billion in 2014.

REALTORS^® have reported that SCRE cap rates averaged 8.0 percent during Q4.14.  Data for the LCRE segment for recent cap rates averaged 6.8 percent in the latter part of 2014.  Whereas steady cap rate compression characterized the past six years in major markets, capitalization rates in SCRE markets exhibited higher volatility.  Moreover, data from SCRE markets clearly display the yield premium associated with secondary/tertiary markets. Averaging the cap rates in LCRE markets over the 2010-14 period, results in a 4-year cap rate of 6.9 percent. Applying the same procedure to data from SCRE markets produces a 9.4 percent yield.

In general, the markets view small commercial buildings as more risky and difficult to finance than is the case for larger buildings. This has been illustrated in the slower post-recession recovery of secondary/tertiary markets, both in terms of fundamentals and asset prices. Conversely, during 2013 and 2014, as investors—buoyed by rising capital availability and shrinking inventory in top-tier markets—shifted their focus to stable markets offering yield premiums over the 5 - 6 percent caps in major markets, secondary/tertiary markets experienced a rebound.  More information on commercial real estate markets can be accessed here.

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[1]               www.realtor.org/reports/commercial-real-estate-market-survey