Commercial starts long climb up from bottom

The commercial real estate market in Northern Colorado and around the country hit bottom in 2010, which experts say is good news. They forecast a slow, steady 2011 with some “rays of hope.”

A national commercial real estate survey from the Urban Land Institute and PwC forecasts tempered market improvements in 2011 as banks continue to strengthen balance sheets and increase lending, resulting in higher transaction volumes. Borrowers with well-leased cash-flowing properties will have a better chance to refinance, while overleveraged owners dealing with high vacancies and falling rents may face foreclosure.

In Northern Colorado, the Everett Real Estate Center’s mantra for 2011 is “about the same, but slightly better,” according to its Commercial Real Estate 2011 survey. Steve Laposa, director of the center, said he noticed a “quiet optimism” among survey respondents for 2011, with bright spots in leasing and sales transactions and value growth possibilities for multifamily, student housing and senior housing.

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Respondents felt the Interstate 25 and U.S. Highway 34 interchange in Loveland offers the best opportunities for development in the near future, while they fear the proposal to tighten restrictions within the 100-year floodplain will have a negative impact in Fort Collins. Loans for land and construction will remain challenging, and private equity sources will dominate financing.

Laposa said vacancy rates have come down in the office markets and retail rates are staying flat. “It’s not gangbusters,” he said. “But I’m not really sure we want to be gangbusters like we were. Gangbusters leads to cyclical swings that are not good in the long term nor are they sustainable. What I see in 2011 is building the base for sustainable growth, not hyper-growth, building our base through continued employment growth, limited new supply, continued stable demand. That puts you in a place where you’re not going to have phenomenal appreciation rates, but you’re not going to have depreciation, either.”

Mark Bradley, a broker with Realtec focused on Greeley, agrees there are glimmers of hope, “but by no means are we back to what I would consider a healthy economy.”

Greeley is still seeing instability in valuation with many bank-owned properties on the market and owners under pressure to sell quickly.

Glimmers of hope

The glimmers include sales volumes up and vacancies down substantially from 2009, as well as some retail and office activity.

“Those two sectors are still pretty slow, but people are realizing we’re at or near bottom and that it’s a good time to try to secure their positions for the future,” Bradley said. “We’re seeing buyers take advantage of low prices that are out there. Financing continues to be difficult for a lot of people. Banks are turning to lending again, but underwriting requirements are a lot stricter than they have been in the past.”

Realtec expects a major turnaround will not happen until 2012 or 2013. In the meantime, there will be some new construction in 2011. Noble Energy plans to build a new field office in west Greeley. Convenience stores and fast-food restaurants are starting to look at new construction. Industrial vacancies are so low that Realtec is looking to develop a new, 30-acre industrial park in east Greeley.

“We’re in the preliminary planning stages,” Bradley said. “The hope would be to get it up so somebody could put up a building on it next summer.”

NewMark Merrill Mountain States managing director and principal Allen Ginsborg said this was the most challenging of his 28 years in shopping center development in terms of keeping occupancy up. “We’re figuring out new ways to do things, not to say our tenants or shopping centers are our enemy,” he said. “The economy is the foe.”

Recovery in Colorado is lagging behind Chicago and Southern California, where NewMark also has a presence. “Colorado didn’t quite take the beating that I think some of the other communities did, but Colorado also doesn’t get the oomph when things return,” Ginsborg said. “The demand curve doesn’t come back as quickly.”

Retail sales are up from this time last year but still far from the levels of prior years, and rents will not stabilize until retailers start to open new stores and compete for space. For now, they remain spotty while prices improve in some areas and fall in others.

“Last year was shock and awe, the oh-my-gosh-we’ve-been-attacked,” Ginsborg said. “Now this year is we’re-under-siege: how do we function when we’re under siege? This year looks the same as last year. We’re not freefalling. We’re bumping along the bottom.”