Is it Primetime for Small Cap Investors?

By September 7, 2016 No Comments

Large commercial properties in the major cities have certainly enjoyed an uptick in the real estate market, but the real opportunity for individual investors is the blossoming market in smaller commercial properties.

A recent study of commercial real estate transactions revealed record numbers of commercial real estate transactions under the $5-million-dollar threshold. Along the same line, sales volumes of small-cap assets are moving at the fastest pace since 2005.

Is Smaller Better?

Investing in smaller commercial properties has its advantages. For starters, these opportunities don’t generally attract the big fish – global investors. Another advantage is that these types of investments move in value similarly to residential properties in their area, which is showing strong signs of growth.

Small is Beautiful?

The small-balance commercial real estate market in most areas is becoming increasingly fragmented. For example, the top 15 small-balance lenders in late 2015 captured 20% of the sub-$5 million dollar deals, but these banks are also trying to shed the loans in since the beginning of 2016. The reason? These banks are facing increasing competition from non-traditional competitors, including online crowdsourcing. In fact, the trend of small business real estate loans within bank portfolios is declining rapidly in 2016.

That being said, record low vacancy rates and expanding gains in leasing demand seems to indicate a banner year for the small-balance space. For example, rental rates for smaller warehouse and flex buildings are doing very well, as are office and retail rental rates.

Another factor to consider is the relative lackluster pace of new construction projects in the small cap space. The result of the slower pace of development puts upward pressure on rental rates and downward pressure on availability – a win-win for small cap investors.