Small Commercial Property Market Nears Bottom

Although rents for small industrial and office properties (under 50,000 square feet) continue to drop at the fastest rate since the beginning of the economic downturn, the velocity of decline has finally stopped accelerating. According to the latest monthly small-cap research from Boxwood Means Inc., U.S. industrial asking rents fell 0.61 percent in May to an average of $7.63 per square foot and office rents eased by 0.27 percent to $18.21 per square foot.

Rents have fallen for 18 consecutive months as the pace of decline has reached peak levels. Nevertheless, negative rent growth has flattened out since the beginning of the year, offering fresh evidence that a market bottom may be near for this hybrid sector. The research firm attributes this to the residential housing market, which is showing signs of stabilization. As that market stabilizes, “it follows that the small commercial market, which is highly dependent on neighborhood-based businesses and residential communities, might also be finding a market floor,” according to Randy Fuchs, principal and co-founder of Boxwood.

Financing availability has been a differentiator that has propped up the small-cap sector. Small commercial landlords have generally been able to obtain financing for their properties from small local and regional banks, thrifts, and credit unions. By doing this, these owners have been able to sidestep the funding challenges and distress that larger or institutionally based property owners have faced.

Even so, the recession has touched all commercial property owners, with small-cap industrial rents decreasing 1.21 percent over the last three months and 5.64 percent since May. Among the major industrial subcategories, rents for manufacturing space have performed best, with losses of 4.09 percent year on year to $8.53 per square foot. Flex properties have declined 4.91 percent to $9.23 per square foot, while warehouse rents fared the worst, down 5.52 percent to $7.92 per square foot. These rent declines have varied by region as well, with the severest industrial rent losses in the Southwest in places such as Phoenix, Las Vegas, Texas, and Colorado.

On the other hand, small-cap office rents, which have been relatively unscathed during this recession due to a smaller exposure to large financial and professional services firms, lost only 0.54 percent nationwide over three months and 2.22 percent over 12 months. However, among the regions, the Southeast and Southwest again under performed with declines of nearly 5 percent for the last 12 months.