Commercial real estate prices are known to adjust slowly to changing market and capital market conditions. Unlike the more reactive public real estate markets, the lag in CRE price movement is caused by the relative lack of transparency within the massive private real estate market.
Despite unfavorable winds and serious waves of doubt, the small-cap CRE market found safe, if not temporary safe harbor at year’s end.
The total market dollar value of small-cap CRE rose marginally in 2022 headlined by a shift in opportunity and risk for investors and lenders. Though the market’s total equity valuation in December testifies to this domain’s inherent resilience, sinking deal volume, decelerating prices, and rising cap rates over the second half of the year curbed the market’s considerable expansion following the Covid-19 pandemic.
Last year’s halt to accommodating interest rates by the Federal Reserve, punctuated chiefly by a series of extraordinary increases in the fed funds rate targeting deepening inflation, has curbed the CRE market’s expansion and long-standing stability. The winds have perceptibly shifted, now exposing investors and lenders to potentially widespread market and collateral risks unseen for about a decade notwithstanding the pandemic’s interregnum.
The valuation of commercial real estate assets is fundamental to a lender’s decision to extend credit. Firms like Boxwood Means are often summoned to render commercial evaluation services by developing valuation reports that employ the sales comparison approach, income approach or both. Today, lenders need to be mindful of the elevated risks associated with their chosen valuation methods and tools.
The pace of commercial lending transactions, from initial loan application to loan closing and issuance of funds, has accelerated rapidly in recent years. Unfortunately, the traditional appraisal process has not kept up with the faster-paced needs of lender clients and their borrowers. This situation has led to the promulgation and widespread use of commercial evaluations.
Even before the Fed raised the target for the federal funds rate another 0.75% in September, the U.S. central bank had already increased interest rates four times between March and July of this year. While it’s still unclear whether these interventions will take a bite out of inflation, the rate hikes have clearly raised debt costs and have markedly reduced demand for CRE property investments.
The aggregate market value of small-cap commercial real estate properties increased to a new peak during third quarter despite an emerging slowdown in sales transactions and asset price growth.
The pandemic was a hurricane of sudden, widespread chaos and devastation for small businesses and civic life. The toll from the emerging economic storm is still unpredictable. But the latest market data indicates that the current stability of small-cap commercial real estate leasing conditions may be at risk.
Over the past 10 years or more, commercial real estate lenders have grown increasingly comfortable with the appraisal industry practice of integrating a property inspection by a qualified third party into a remotely generated or desktop commercial appraisal or evaluation report.
Many commercial banks have a history of pulling in the reins on CRE lending when macroeconomic conditions deteriorate, especially when a recession looms or makes landfall. Evidence of a bank slowdown is afoot, and SBA lenders are ready to pick up the slack.
The aggregate market value of U.S. small commercial real estate assets rose steadily at midyear despite the increasingly uncertain outlook for CRE prices and the economy at large.
As high inflation and fears of a recession whip through the canyons of Wall Street and Main Street alleyways, stable small-cap commercial real estate market leasing trends have at least temporarily repelled the prophets of doom.
After record-breaking property sales and soaring prices last year, the robust pace of growth in small-cap CRE investments grew sluggish during the first quarter of 2022.
The aggregate market value of the small-cap commercial real estate market has increased substantially as exceptional investment and space market fundamentals prevail.
Small-cap CRE prices have accelerated at an unprecedented rate. The rising inflation in asset values naturally raises the question: Are we in a price bubble? As far as the small-cap CRE market is concerned, the answer appears to be No.
What a year. Powerful market fundamentals overcame Covid-induced uncertainties last year and paved the way to record growth in small-cap commercial and multifamily property prices.
As the pandemic recedes in its depth and power, small multifamily markets have resumed price growth at an accelerated pace. The clear winners are smaller cities that are attractive havens for remote workers.
Maybe I’m too traditional or old school. But why in the world would the CRE industry, or at minimum the real estate press, seemingly embrace the VTS Office Demand Index as an alternative definition of, or even a useful proxy for actual leasing demand?
Small-cap CRE space markets are thriving. If last year’s robust leasing conditions are in any way indicative of, or driven by existing small business optimism, Main Street growth prospects will produce another year of ample opportunity for small-balance lenders and investors.
In the annals of CRE asset prices, the spotlight has typically illuminated the performance of the largest markets at the expense of the smaller ones. However, as the national economy rebounded last year the lesser markets flipped the script and outshone the more visible metropolises amidst unprecedented, super-charged, and widespread property sales and price growth.
Recent opinion polls suggest that small firms have grown less optimistic about the future economic climate, but this year’s economic rebound improved their business health and gave the small-cap commercial real estate leasing and investment markets a jolt.
As U.S. GDP eclipsed its pre-pandemic high during second quarter, small commercial real estate prices rose at the fastest pace since 2007.
After more than a year of pandemic-induced shocks to the U.S. economy and the CRE markets, healthier small-cap occupier markets are coming back into better balance with an investment market that has barely missed a beat.
Small-balance CRE lenders periodically revisit their internal appraisal and evaluation policies for compliance with agency guidelines but, importantly, also with an eye on where they may better contain operating costs and improve their services to borrowers.
Small-cap CRE is rebounding as small businesses come back to life. As vaccination rates approach a positive tipping point here in the U.S., business and personal optimism is rapidly spreading. We are all remembering the value of community, social gathering, and public spaces. We are welcoming the ordinary again, enjoying spontaneous exchanges, making plans.
The COVID-19 pandemic threw the commercial real estate (CRE) market into flux, creating an enormous degree of uncertainty that only underscored the importance of accurate and reliable CRE property valuations.
An abrupt reversal in fortune for small-balance lenders during 2020 was predictable considering the devastating impacts of the pandemic on the Main Street economy. Small-balance loan originations sank to the lowest level since 2010 as a result.
With the small business economy on the mend, occupier trends in the small-cap CRE domain showed strong momentum during first quarter. However, office sector fundamentals continued to take a beating as the stickiness of remote work continued to impede a revival in leasing demand.
Collateral valuation is a recurring focal point for commercial real estate lenders. Ever more so today. As the pandemic plays out, CRE collateral monitoring and portfolio risk management needs are greatly magnified because of material changes in market conditions and certain sectors of the economy.
Despite the fog that shrouded CRE markets over the past year, there was promising improvement in small-cap CRE prices. Price increases were modest but unmistakably widespread, suggesting that the small business economy is poised for take-off later this year.
A fourth quarter rally in small-cap CRE leasing demand raises hopes for a revival of the Main Street economy and an improved outlook for small-balance lenders and investors.
As small-cap commercial real estate gets battered by the pandemic’s brutal toll on U.S. small businesses, the small-cap multifamily sector has handsomely outperformed.
Bloodletting in the small-cap CRE space markets mounted during Q3 as the pandemic’s tenacity stalled an extensive economic recovery, caused more small businesses to teeter or fail, and further deterred legions of professional office workers from journeying to their former workplaces.
Small-cap multifamily properties are proving resilient during the pandemic-induced recession. Occupancies have remained strong, and investors appear to be looking passed increased trends in payment interruptions and the specter of possible tenant evictions.
Despite the ongoing recession, small businesses offered hints of economic promise and revitalization according to Boxwood’s latest data on FieldSmart Evaluations and Restricted Appraisals procured by bank clients for valuing small-balance loan collateral.
Boxwood’s appraisals of almost two dozen multifamily properties in NYC attest to a healthy and stable investment outlook for Class B-type apartment assets during COVID.
Small-cap CRE investment trend data increasingly reflect the impact of Main Street business layoffs and closures in the pandemic’s wake.
Main Street businesses and small property owners increased their demand for new small-balance commercial loans last month according to Boxwood’s latest procurement data on FieldSmart Evaluation reports among clients.
CRE market fundamentals have weakened considerably as small businesses struggle to stay open and/or make do with lower business activity precipitated by the persistence of COVID-19. The impact on small-balance commercial lending is increasingly clear-cut: loan origination volume is contracting, and banks are pivoting towards managing the growing credit risk of their CRE portfolios.
The massive losses of Main Street jobs and commerce since late March sent a shock wave through the small-cap CRE market with devastating Q2 results that underscore the unique vulnerabilities of small businesses to Covid-19 and related shutdown orders.
Small-balance CRE loan extension and modification actions by banks reached a five-month high during June while loan originations took another hit.
Boxwood's property valuation assignments indicate that client lenders remained preoccupied during May with specialized lending activities resulting from the pandemic. Given the nature of current workloads, a return to normal lending routines may be further delayed.
Now that most business leaders and policy makers concede that a sharp V-shaped rebound will no longer take place, the devastating impact that widespread shuttering of small businesses will have on small-cap CRE owners, lenders and investors cannot be understated.
As the coronavirus pandemic wreaks havoc on businesses and public life writ large, its impact, as well as the demands of the federal Paycheck Protection Program (PPP), have disrupted the daily tasks and operations of Boxwood’s bank clients in credit and appraisal departments nationwide.
Fundamentals in the small-cap CRE space market nose-dived during first quarter as the coronavirus pandemic triggered a massive economic retrenchment with wholesale employee layoffs, and company and store closures that now threaten the future of many Main Street businesses. The aftershocks of the disease outbreak starkly remind us of the binding and dynamic relationship between small business and small-cap CRE.
Boxwood's recent analysis of the early, knock on effect of the coronavirus pandemic on CRE space market fundamentals calls into question reliance by commercial bank lenders on Validations in support subsequent transactions.
Many small businesses across the U.S. face a financial crisis from the fallout of the coronavirus causing millions of workers to initially file for unemployment benefits. The abruptness and velocity of business closures is squeezing many commercial property owners who, either as user-occupants or managers of rental properties, are increasingly unable to meet their mortgage payments as cash flow declines.
As sure as thunder follows lightning, CRE participants have been anticipating the fallout of the COVID-19 pandemic on market fundamentals in light of the severe disruptions imposed on the nation's commerce and business. Early signs of a broad deterioration in market conditions are coming into view.
Strong deal flow produced a record year for sales in the small-cap CRE investment market. Buyers’ prodigious demand, inspired by relatively stable U.S. economic and real estate market conditions, also elevated asset prices to an all-time high. However, the current coronavirus pandemic may well interrupt or halt CRE’s long bull run.
They say on Wall Street that bull markets do not die of old age. The same might be said of the commercial real estate market (CRE), which has experienced its own decade-long bull run and, according to industry pundits, shows few signs of running out of steam. Or has it?
With all due respect to The Appraisal Foundation and licensed appraisers at large, TAF's upcoming webinar and ongoing initiative to create "Standards" for evaluations are in my opinion a bold but misguided example of mission creep.
With recession fears abating in the waning months of 2019, the CRE market will register a record tenth year of expansion. National small-cap CRE asset prices have increased substantially over the cycle and have recovered much - though not all - of their losses incurred during the financial crisis.
After a lower interest rate regime settled in by midyear and gave a boost to small-balance lending, it appears that deal-making continues apace this fall based on Boxwood's recent property valuation activity on behalf of clients.
Boxwood's popular Small Commercial Price Indices (SCPI) have been expanded into a wholly new series of metro-level reports designed to shed new light on the dynamics of the small-cap CRE investment market for credit analysts, underwriters, and asset and portfolio risk managers.
Most mainstream views on CRE investment and space market fundamentals remain upbeat nearly half-way into the year. The blue-skies outlook is framed by rosy U.S. economic headlines and a top-down assessment of the general CRE market punctuated by heroic large deal activity monitored most heavily by the industry press. However, clouds are gathering when it comes to the small-cap CRE market.
Last year's haul of loan originations reminds us once again how fertile the fields are in small-balance commercial lending.
It's the proverbial low-hanging fruit. In our recent survey, bank clients didn't frame their use of commercial evaluations in precisely those terms when describing the bevy of benefits produced. But they might have.
It' s been almost 10 years since the end of the Great Recession, but it may be surprising that small-cap CRE asset prices have not fully reset across all U.S. metro areas.
Small-balance loan volume was roughly on trend during Q3 of last year according to our latest research. Even so, a rising interest rate environment has slowed both investment property sales and purchase loan activity.
The feeding frenzy for small apartment assets that catapulted prices to record highs may soon be over. Small-cap multifamily prices continued to rise in September and now exceed the previous 2006 peak level by more than 40% according to Boxwood's research. But price growth has fallen off considerably, dropping to a range of single-digit, annual increases nearly on par with a decelerating single-family residential (SFR) housing market.
With $108 billion of closed small-balance commercial loans during the first half of 2018, the SBL market is on pace to exceed the $200 billion level for the sixth year in a row. Yet investment fundamentals are beginning to fade and market risk is ticking up with higher interest rates, peak asset prices and intense competition for loans. Together these factors may challenge this positive outlook or, worse, signal an end to the current cycle.
Small-balance commercial loan originations rose by 12.6% during Q2 to $57.0 billion as small-cap CRE investors and operators continued to take advantage of a favorable lending climate resulting from a surplus of debt capital coupled with strong operating and investment fundamentals.
Commercial evaluations are an increasingly important tool for financial institutions that require valuations of small commercial properties. However, unlike appraisals, there is no significant quantitative measures or research regarding the accuracy of evaluations or the risk of relying on them.
The engine that produced massive small-balance loan originations of $230 billion last year is losing some steam. The $50.6 billion of new loans generated during Q1 cannot be ignored for its heft, but a recent softening trend is not inconsequential either. Total quarterly origination volume was the lowest in four years and receded by 9.7% sequentially and 14.4% YoY.
While uncertainties linger about the CRE market's endurance, small-cap investors are proving to be marathoners. U.S. investment activity shows little sign of fading as $38.7 billion of small commercial and multifamily properties under $5MM traded hands over the first four months of the year, outpacing by 3.1% the deal volume for the corresponding period of last year when annual property sales hit a record high.
With the agencies' recent doubling of the appraisal threshold amount to $500,000, commercial evaluations are a new-found opportunity for financial institutions to further reduce lending costs while also curtailing appraisal fees for borrowers on selected loan originations.
Extremely low space availabilities in the small-cap CRE space have electrified rents to the delight of small-time investors. Since 2006 the average annual increase in industrial rents, for example, was a modest 1.5%. Yet small-cap industrial rents have consistently exceeded 2% rent growth in each of the last five quarters, soaring an extraordinary 2.9% over three months ending this past March.
It wasn’t long ago that commercial banks dominated CRE lending in the small-balance market. That supremacy is facing increasing challenges from a plethora of non-bank lenders including debt funds, marketplace lenders, private lenders, specialty finance firms and selected life insurance companies among others.
The doubling of the appraisal exemption from $250,000 to $500,000 instituted earlier this month could not have occurred at a better time. Though far from a panacea for inherent inefficiencies in small-balance lending (SBL) among commercial banks, the new mandate for commercial evaluations represents a sizable dollar and sense opportunity.
For the first time in seven years, sales prices for small commercial properties outperformed their counterparts in the large-cap domain. Boxwood's Small Commercial Price Index (SCPI) that tracks sales prices of properties trading under $5 million in value finished 2017 with an annual return of 5.9%, the highest price gain since the previous peak in 2007.
With the issuance of their final rule last week, the agencies have raised the ceiling on the use of commercial evaluations for the first time in over 20 years, from $250,000 to $500,000. By lifting the appraisal exemption level, the agencies have handed regulated institutions a sizable opportunity to cut their lending costs.
As the New Year continues into February with uncertainty hovering over the CRE market, we can gain some encouragement from a historical perspective as well as by parsing general and small balance commercial real estate trends.
With their Notice of Proposed Rulemaking this past summer, the federal agencies intensified the debate over an appropriate change, if any, in the appraisal exemption level as identified in the Interagency Appraisal and Evaluation Guidelines. The agencies proposed an increase in the current de minimus level, locked in at $250,000 for over 20 years, to $400,000
We're often asked how it could be that small cap CRE prices trail by so much the robust appreciation of institutional assets over the last couple of years. We suggest that the answer lies generally with a disparate supply of capital, but we can also say that some small cap CRE markets have nevertheless performed quite well, thank you.Institutional prices, here defined by the RCA CPPI - Core Commercial Index that tracks principal commercial (non-multifamily) transactions above $2.5 million
Widespread references to baseball inning analogies underscore the pre-occupation these days among industry players with how much more time is on clock (ugh!) before CRE market fundamentals and sales prices begin to falter. Seven years into the market's expansion, an absence of clear directional signals only heightens the unease and perceived investment risk for lenders and buyers.Yet small balance market participants may draw some inferences about the future outlook from residential housing
We're proud to have Randy Fuchs speak again at this year at MBA's upcoming Small Balance and Portfolio Lending Summit. The small commercial property and loan markets - like the CRE market at large - have been consistently strong over the course of this lengthy market expansion. However, winds of change may be afoot as space market fundamentals have recently stalled and property sales have declined. Join Randy and other panelists for
Popular wisdom is that national commercial real estate prices have reached new heights in the post-financial crisis era. This view was recently boosted by the Federal Reserve Chairman, Janet Yellen, who signaled that CRE prices were "high," while other Fed officials expressed similar concerns about over-heated markets.To combat the potential for asset price bubbles, Federal officials say they are leaning towards enhanced financial supervision of commercial banks and thrifts. That's all well
Even after a five-year run, multifamily assets remain the hottest commodity among all primary property types. With a 1% gain preliminarily in August, small multifamily asset prices have returned 7.9% year to date and a sizable 10.1% compared with 12 months earlier according to our latest research. Such properties, defined by transactions with a value under $5 million, largely represent the affordable rental housing stock for lower-income households.The rising price trend for smaller multifamily
Small cap CRE space market results for third quarter dispelled any rumors about the bull market's demise, as the latest wave of tenant demand propelled vacancies into unprecedented, low territory.Aggregate net absorption of 68.1 million sq. ft. across office, industrial and retail sectors ranked as the second largest quarterly total in over nine years (after second quarter's record total). This year's massive leasing velocity dismisses outright any concerns about the sustainability of the small cap CRE
The classic supply-demand graph nearby is common fodder for industry professionals who know that times are good when the national vacancy rate drops to new lows following leasing demand that convincingly exceeds supply. We can end the story there by subscribing to the idiom above, but to do so comes with the risk of overlooking the latest, impressive chapter.The fact is that small cap CRE fundamentals are at a momentous point in the current cycle because of favorable, if not restrained U.S.
Appreciate the opportunity to speak at the MBA's inaugural Small Balance Lending conference in Chicago last week as part of a great panel session on market trends. I [Randy Fuchs] likened the event to a 'coming out' party for the small balance market and its participants after years in relative obscurity, and I'm grateful that MBA stepped up to the plate and made it happen.We foresee another banner year for small balance lending; first quarter commercial/multifamily loan originations were
The Sirens were simultaneously beautiful and treacherous creatures of Greek mythology whose enchanting voices and music tempted mariners to draw near, only to shipwreck on the rocky shores of their island. Though their fate is far less cataclysmic, several de novo lenders - some with bucket loads of venture capital for online marketplaces - were beckoned by the siren call of the small balance lending (SBL) market and now face a stark reality: the ostensibly highly-fragmented and boundless
The window looks to have closed on the double-digit annual price gains of the last couple of years. Our reading of the Core Commercial (CC) component of Moody's/RCA CPPI (that excludes multifamily and tracks sales transactions of investment-grade properties principally above $2.5 million) suggests a turn in market sentiment, as large cap CRE prices slipped for a third month in a row, off 0.6% in February and 1.8% since December. The last time the CC Index posted three consecutive months of negative
The big run-up in small cap multifamily prices has abated. Boxwood's Small Multifamily Price Index for assets under $5 million rose to a new high in January, but the slim 0.2% gain was the lowest monthly increase in four years following a similar increase in December. And though these assets generated a healthy 7.5% annual return in January, it prolongs a downward trend of single-digit, annualized price advances that began last August.The pull-back mirrors somewhat softer multifamily space
We often talk about the important relationship between small cap CRE and residential housing. Years ago our research showed that small commercial property prices were more highly correlated with home prices than with prices for institutional CRE assets which tend to be more influenced by the ebb and flow of global investment capital. So it's no surprise that we continue to keep a pulse on home prices and their impact on small cap CRE.Of late, home prices have flattened out. While
Scrappy private lenders increased market share last year as small balance commercial originations volume soared to $180 billion. In this increasingly competitive marketplace, private lenders and individuals grabbed a 1.4% share of the dollar volume for commercial and multifamily loans under $5 million - doubling their stake from 2014 - and elevating the group to fourth from 11th place among the top 20 SBC lenders. See the nearby league table.JP Morgan Chase Bank
Before the noticeable successes of 2015 disappear from the rearview mirror, it's worth highlighting two dimensions of last year's outperformance in the small commercial property and loan space.First, Boxwood tracked a massive $180 billion of small balance commercial (SBC) loan originations under $5 million in value. This was the highest volume on record, advancing 9% year over year and eclipsing the previous peak of $176 billion posted in 2013. How big a market is this really? Well, the SBC loan volume
Market perceptions are that CRE conditions have deteriorated in metro areas with a sizable economic dependence on the slumping energy industry. However, Boxwood's Small Commercial Price Index (SCPI) has yet to reveal any substantial across-the-board fallout for CRE in selected oil patch metros. While a couple of the smaller energy-dependent cities have shown a bit of weakness, generally speaking small commercial property prices in these markets proved to be buoyant during 2015.
Double-digit 12-month returns for large cap CRE prices over 30+ consecutive months have raised some concerns over the sustainability of this rising price trend. For some perspective, the graph nearby plots the spread between Boxwood's SCPI-117 national composite index of small cap CRE prices and large cap prices represented by the Moody's/RCA Core Commercial Index (excluding multifamily). As shown, prices for significant assets were 29.3% higher than small commercial asset values (under $5 million) as of November
Recent property valuations by Boxwood's clients hint towards a possible slowing in small balance loan originations at year end. Originations accounted for 30% of the valuation uses for FieldSmart reports ordered by SmallBalance.com clients during fourth quarter, down nearly four percentage points from third quarter. Loan renewals rose with a plurality of 33% of all valuation uses Though representing a small overall percentage
Small balance commercial (SBC) loan originations topped $46 billion during third quarter representing a 5.0% increase for the period and a healthy 8.7% gain year over year according to Boxwood's latest market research. The strong year-to-date volume of $129 billion, sustained by rock-solid space market fundamentals and ample, low-cost debt, is on pace to challenge the record total of $176 billion posted in 2013. See Boxwood's upcoming Small Balance Advocate monthly report for more details and our
Construction cranes, trophy deals and soaring asset values in some big cities can hoodwink us about the overall circumstances of CRE prices. Read the full article here.