January 2012

Small-cap CRE sales trends demonstrate surprising equanimity in the face of serious U.S. economic and fiscal uncertainties. Though CRE market fundamentals offer little cheer going into the New Year, sales prices nevertheless appear to be strengthening.

Most of this improvement stems from smaller markets. Boxwood's SCPI-80 that tracks secondary and tertiary markets increased 0.8% over the three months ending with October (the latest data period available). What may be unexpected is that despite the modest run up in, and enthusiasm for larger markets earlier this year, it is the subsidiary markets with an increase of 1.4% that have produced the best overall performance over 12 months.

In fact, nine of the top 10 performers over 12 months include smaller markets, led by Rochester, NY (+13.2%), Omaha (+10.5%), New Orleans (+9.7%) and Tulsa (9.5%). Tulsa, which ranks No. 1 with heady price appreciation of 26.4% over 24 months, offers stark testimony to the positive impact that growth industries (e.g., oil and gas) can have on local real estate markets.

Overall, 17 metro areas posted 12-month price increases since October 2010 and 28 cities posted positive price changes over three months. As a result, Boxwood's SCPI-100 for 102 metro areas moved into positive territory over the last three months with a 0.5% increase. The annual price decline has contracted to a mere 0.7% and would be even more buoyant if not for troubled CRE markets especially in the Southwest and South Florida.

Clearly, however, it is the bigger metro areas that, as a group, have relatively under-performed of late. Boxwood's SCPI-20 representing the same 20 primary metro areas that comprise the S&P /Case-Shiller housing price index has treaded water for the last three months with a 0.1% decline. Over 12 months, the index has fallen 4.8%. This trend suggests that the appeal of larger markets has generally dissipated as investor concerns over CRE markets have intensified as U.S. economic woes persist. Not surprisingly, the S&P/Case-Shiller home price index for the same metro areas has similarly declined by 3.4% year over year.

See this page for background information about Boxwood's SCPI measures.