Strong forecasts, deals anchor hope for commercial real estate investors
The Pikes Peak region commercial real estate market — as is true in most parts of the country — serves as an economic health barometer.
And today’s readings show pressure is rising on the local real estate investment scene.
Concerns about overleveraged or devalued commercial real estate, owned by investors hit hard by slipping rents and lenders unwilling to refinance short term loans, are real.
And, while those in the industry acknowledge the economic details are grim, they say it’s only a temporary part of the rise-and-fall cycle of the real estate industry — just part of the game.
The good and bad
About $160 billion of U.S. commercial properties are now in default, foreclosure or bankruptcy, and another $30 billion in real estate debt held by failed banks is also beginning to appear on the market, according to a report from the Real Capital Analytics, a New York-based research firm and the Wall Street Journal.
Even in the midst of what could be an extended two- to three-year recovery cycle, a recent WSJ.com story reported that large-scale investors like Blackstone Group LP are already snapping up distressed Manhattan, N.Y. holdings.
On the other hand, researchers at Jones Lang Lasalle have reinforced a potential 2010-2011 recovery, predicting that U.S. transaction volumes this year will increase between 30 and 50 percent — led by office sector sales. Dollar volume could spike as much as 70 percent.
Locals weigh in
“We’re not immune from broader economic trends,” said Grubb & Ellis Quantum managing broker Dale Stamp. “Like any investment, you’ve got to diversify. If you put some in the stock market and hit it right, you can do very well. It’s the same in real estate — if you buy in the right location, at right price.
Stamp said office, retail and industrial owners will see some lulls, cycles similar to the stock market’s.
“But you don’t see many people — especially those who have become wealthy — that don’t have a diversified portfolio containing some real estate,” he said, adding that even the U.S. government promotes property ownership through capital gains depreciation and home mortgage interest tax write-offs.
“When you look at your retirement savings accounts, you’re pretty much forced to put money into stocks and bonds in your 401(k). The government is generally pro stock market and pro real estate, so for the long haul you should have both stocks and bonds, as well as a home and maybe some investment-producing property.”
His view is shared by local Grubb & Ellis broker Mary Francis Cowan who specializes in investment real estate.
“We’re fortunate that we haven’t seen the freefall other areas like Arizona and California have,” she said. “Our military serves as a valuable anchor, but like everywhere else, we are still seeing a lack of available financing for commercial real estate. It’s something, as a broker, you have to deal with everyday.”
She said buyers and lenders are nervous and will seek continuing decline in lease rates, which will mean lower property values.
And the market still hasn’t hit bottom.
Other G&E brokers expressed guarded optimism, based primarily on slow, but steady, El Paso County transaction activity.
Rich Kelly and Andrew Madden both expect “stabilization” in the industrial marketplace this year.
“Most of the deals financed now are for owner/users who can get SBA or private funding,” Madden said, adding that a few larger firms such as the Synthes office in Monument which recently added 40,000 square feet of warehouse space are doing “OK” as well.
“Since mid-January, we’ve actually begun to see an uptick in activity — but we’re inching back to business levels of a year or two ago,” he said.
Kelly, likewise, expects a relatively busy first quarter. As the listing broker on the former Post Time dog track on North Nevada Avenue, he said he’s already been surprised at the number of leases he has signed, not to mention a number of inquiries that range from a new flea market to an R.V. expo in March.
He expects things to return to near normal through 2010 and 2011.
Office looking up
G & E office brokers Andrew Oyler and Russell Stroud, also see some reason for optimism after a dismal 2009.
“We’re watching more tenants lock in their leases after going month-to-month,” Oyler said, adding that many are also asking their landlords make minor concessions or to provide tenant improvements.
And broader national trends — especially as a result of government stimulus spending — resonate in the Pikes Peak region as well.
“Fourth quarter GDP numbers, up more than 5 percent mean that inventories aren’t moving and job growth may follow,” he said.
The two brokers see medical office leasing activity as fairly strong, in spite of heavy competition for tenants in north east Colorado Springs.
Other good news comes from the Jackson Creek Commerce Center where two office condominiums have recently sold.
Retail: The jury’s out
Retail broker Candace Seaton sees the city’s major demographic shifts as part of the reason many older centers are experiencing increased vacancies.
While progress continues at Citadel Crossing and University Village Colorado, regional malls continue to lose ground, she said.
“Even lifestyle centers like the Promenade Shops [at Briargate] that started out asking $40 to $45 per square foot are now subleasing in the high $20s,” she said.
Overall, both Seaton and Oyler have seen an upswing in anchored-center leasing in places like the Kings Soopers shopping center along South Academy Boulevard. They also agreed that returning troops really have helped that area.
Retail will most likely begin recovering once home building returns to pre-2008 levels on the city’s north and east sides.
Local investors: Take note
The availability of capital and financing will determine how soon the investment market returns — and so far, banks are lending and prices haven’t softened enough to attract investors to Pikes Peak region office, retail, office and industrial properties.