While so much of the focus has been placed on the increasing amount of large commercial real estate sales taking place, sales of smaller commercial real estate are also reaching record levels.
According to a report released earlier this month by Boxwood Means, the number of commercial properties valued under $5 million that changed hands during the first half of the year did so at a record level. Statistics showed that sales of these smaller assets grew 14.4 percent during the first half of 2015 over 2014 totals. Furthermore, sales activity is moving at the fastest pace the market has seen since 2005. As a result, the report noted that 2015 sales of smaller properties should easily eclipse last year’s record total volume of $81.1 billion.
There are a number of a factors contributing to the rapid pace of small commercial property sales. For one, this sector still remains a buyers market. While larger assets have become more of a sellers market, prices of smaller assets remain reasonable in most markets. Vacancies have also fallen and new construction has struggled to make significant headway causing these properties to remain very attractive to both users and investors.
The ease of commercial mortgages is also playing a factor. The availability of capital is very high for smaller assets. These investments are not seen as risky as larger ones by lenders. Consequently, borrowers are afforded more flexible financing options such as variable rate loans, non-recourse loans, or portfolio loans. Fast loans are also achievable with smaller assets because of various programs in place that remove so much of the hassle and red tape seen with larger commercial mortgages.
Another reason for the growth in smaller commercial property sales is their stability when compared to other investment vehicles. With so much volatility occurring on Wall Street and larger commercial properties becoming overpriced, many experts see smaller commercial properties as a prime vehicle to place investment dollars during this stage of the economic cycle. These properties have also shown to be more resilient than larger assets during economic downturns.
As mentioned earlier, the report noted that sluggish new construction is playing a role. While new construction of large commercial property has increased, construction of properties under 50,000 square feet in size has actually decreased. Construction was down 20 percent during the first half of 2015 with 63.3 million square feet of new space underway. In fact, new construction activity decreased in the second quarter of 2015 from the first quarter.
With new construction and vacancy low, there is little supply available making smaller commercial properties prime investment vehicles. With prices having only grown an average of 5 percent, the report noted that this sector of the market is the best it has been for investors in many years. New construction at some point will likely pick up pace but some of that will be driven by new construction loans as some businesses opt to build their own facilities rather than attempt to find and buy an existing one.
Obviously, now is the time to strike if you are an investor seeking smaller commercial mortgage loans or a small business looking to buy or build your own facility. It is unknown how long this window will stay open this wide.