Some Comparisons: Small and Large Commercial Real Estate Transactions

The investment sales markets for large and small commercial buildings are distinctively different.  NAR’s Commercial Real Estate Market Trends report summarizes sales and rental activity based on a quarterly survey of commercial REALTOR^® practitioners[1].  A second report, NAR’s yearly Commercial Lending Survey report provides information on commercial real estate financial issues addressed by REALTORS^®.[2]  Both reports present commercial real estate information generally not available elsewhere: the average commercial transaction size in markets served by REALTORS® has been about $1.6 million, significantly below the $2.5 million threshold typically used by major databases in providing information on commercial transactions.  Although many REALTORS^® participate in transactions above the $2.5 million threshold, in general REALTORS^® report that they serve a segment of the commercial real estate market for which data are generally not reported—Small Commercial Real Estate transactions (SCRE) under $2.5 million, in contrast to Large Commercial Real Estate transactions (LCRE) over $2.5 million.

NAR has estimated that the commercial market for buildings selling for under $2.5 million could be in the neighborhood of $50 billion annually, compared to the market for large buildings—which totaled $430 Billion in 2014.  A comparison of the two market segments—SCRE properties valued below $2.5 million vs. LCRE properties valued above $2.5 million shows their difference in terms of sales.

In 2014 REALTORS^® reported an increase in SCRE sales volume of 10 percent year-over-year.  In comparison, data for the LCRE segment showed a sales volume increase of 21 percent for 2014 vs. 2013. The contrast between the two markets is sharper when taking into account a longer time horizon, and it underscores the post-recession difficulties experienced in sales of smaller buildings and properties located in secondary/tertiary markets. Over the 2009-14 period, sales volume for LCRE markets averaged 35 percent growth. For the same period, sales volume in SCRE markets averaged a negative one percent growth.

Some of the discrepancy between the two markets may be due to tight credit—reported by NAR’s commercial practitioners as having been unreasonably tight.  Some of the discrepancy between the markets may be due to location and usage, with smaller buildings having very different characteristics than larger Class A office space in central business districts.

More information on commercial real estate markets can be accessed at: http://economistsoutlook.blogs.realtor.org/2015/04/30/small-commercial-real-estate-market/.