Smaller Commercial Real Estate Deals Outperform Big-Ticket Properties
As investors adapt to shifting market dynamics, many are pivoting toward smaller commercial real estate deals. This market analysis explores the growing value divergence between large institutional-grade assets and more modest general commercial properties. The trend suggests that in today’s climate, smaller may actually mean smarter—especially when it comes to occupancy, returns, and long-term growth potential.
Why Smaller Commercial Real Estate Deals Are Gaining Momentum
The latest CoStar CCRSI data reveals a widening performance gap between high-value and smaller CRE assets. In February, prices for small U.S. commercial properties rose by 1.1%, while prices for larger, institutional-grade properties fell 1.3%. That’s more than a blip—it’s a trend powered by tenant behavior.
Occupancy Trends Favor Smaller CRE Deals
Tenant absorption is telling a stark story. For the first time in over 15 years, net absorption has gone negative, meaning more space is being vacated than leased. However, not all property types are being hit equally:
- Investment-grade properties are projected to lose 4.5 million square feet (MSF) in net absorption over 12 months.
- General commercial properties are still absorbing space, with 3.7 MSF projected gains.
This marks a clear divergence in tenant demand—and investors are following suit.
Smaller Commercial Real Estate Deals Lead Investment Activity
Investor preferences are reflecting this split. In six of the past 24 months, general commercial repeat sales volumes equaled or surpassed investment-grade volumes—a milestone not seen since before 2009.
This shift indicates a fundamental change in buying behavior. Rather than chasing high-profile assets with softening fundamentals, investors are favoring smaller deals that offer:
- Consistent occupancy rates
- Lower acquisition costs
- Greater operational flexibility
- Higher relative returns
For tips on how to identify value opportunities, check out our guide on finding undervalued CRE assets.
Growth Trends Highlight Smaller Deal Advantages
Long-term data supports the strength of these smaller commercial real estate deals. Since February 2020:
- The equal-weighted CCRSI, which tracks smaller deals, is up 33%.
- The value-weighted CCRSI, which emphasizes larger transactions, is up just 8%, falling behind the 23% CPI inflation growth.
This means many large asset investors are losing real value, while smaller deal investors are ahead of the curve.
Case Study: Investor Success with Small CRE Deals
Consider a real-world example: A regional investor in Indianapolis recently shifted away from high-dollar office buildings to local retail strips under $5 million each. Since 2022, they’ve acquired four neighborhood centers, now operating at 95% occupancy. Their previous downtown office holdings, by contrast, were experiencing vacancy rates above 25% and rising operating costs.
This successful pivot to smaller commercial real estate deals illustrates why more investors are making the switch.
Conclusion: Smaller CRE Is the Smart Play for 2024
As big-ticket commercial real estate struggles with higher vacancies and weaker fundamentals, smaller commercial real estate deals are emerging as the more resilient, flexible, and profitable choice.
For further reading, explore our in-depth guide to navigating rising vacancies in commercial real estate or see the NAR’s 2024 CRE Forecast for broader market trends.
