Commercial Real Estate: Small-Cap Real Estate Booms
After the post-pandemic jolt to the U.S. economy and the CRE markets, small-cap commercial real estate is finally coming back into balance with larger properties.
This is according to Boxwood Means, a leading national provider of high quality valuations, data analytics and research for the small-cap commercial real estate space.
Their co-founder, Randy Fuchs, says net absorption in smaller CRE properties shifted into higher gear during the second quarter.
“Net absorption rose for the third quarter in a row across the industrial, retail and office sectors as small business employment continued to expand,” he said.
“Aggregate demand was more than two times the first quarter’s volume, the best increase in twelve quarters.”
New Jobs Boost Small-Cap CRE
Fuchs says small-cap industrial demand is red hot again. Demand surged as manufacturing, transportation and warehousing produced 713,000 net new jobs since last June 2020.
As employment rallied, small-cap industrial space occupancy jumped more than 50 percent to nearly 25 million square feet. Industrial vacancies dropped 30 basis points to 3.3 percent, near the record low 3 percent set in 2018.
Commercial Real Estate: What are Small-Caps?
To get a better idea of this recent rise in small-cap stocks, let’s back up and get a better fundamental understanding of them.
Small-caps are shares of ownership of small businesses and have a market capitalization of between $300 million and $2 billion. The market cap is measured by the number of shares outstanding times the price of each stock.
Pros of Small-Caps
Small-cap companies have greater growth potential and that’s because they have a smaller operational and financial base.
Their small size also makes them riskier investments since they don't have the financial cushion to withstand crises or poor management.
Small-cap companies do especially well early in an economic recovery, hence why the small-cap real estate marketing is currently booming.
That's because interest rates are still low. It gives them easy access to funds to invest in their growth.
Cons of Small-Caps
On the other hand, they are also the riskiest stocks during an economic downturn since smaller companies are more likely to fail in a recession.
As a result, most decrease their allocation of small-cap stocks when the business cycle enters the contraction phase.
Retail Small-Caps Surge
In their report, Boxwood Means also stated that retail fundamentals beat expectations. In fact, small-cap retail occupancies rose 20.1 million square feet, the best quarterly performance in nearly three years.
At an average 23 percent, small-cap companies actually report the highest proportion of shares held by retail investors and 45% of small-cap firms reported an increase in retail holdings over the last 12 months, going back to 2020.
The national vacancy rate also dropped 20 basis points to 4.3 percent, returning to the level seen a year earlier.
Total small-cap retail space availabilities narrowed by 30 basis points to 5.6 percent, matching the lowest level on record, as sublet deals increased.
“For a sector whose general demise has been widely exaggerated, the retail sector’s resilience was convincingly affirmed during the second quarter,” Fuchs said.
Looking Ahead to 2022
If the small-cap boom is any gauge, the year ahead is likely to see further improvement in commercial real estate markets as the economy continues to recover from the Covid-19 pandemic.
Going forward into 2022, if this pre-Covid levels continue and a much lower labor level is achieved, the productivity gains will be enormous and that’ll lead to better profits.
Real Estate Matrix is one of the Southeast’s premier commercial valuation firms and has participated in the valuation of billions of dollars in real property assets.
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