Investors return to commercial properties

Commercial real estate has been the long-anticipated next shoe to drop in the economic downturn. But local professionals are seeing activity pick up despite continuing challenges of valuation and financing.

Commercial real estate is part of Northern Colorado’s economy of relativity. Things are still well below their peak of a few years ago, but doing well relative to last year.

“We’re up 75 percent over where we were this time last year,´ said Realtec broker Jason Ells. “We are certainly encouraged to see buyers coming back.”

Realtec brokers have seen increased lease and sale activity across most sectors. Areas of strength and weakness vary slightly within the region. However, industrial/primary employer interest appears to be generally strong while land remains soft.

“In Greeley, things are picking up due to the industrial sector,´ said Realtec broker Mark Bradley. “It’s an encouraging sign because it points to primary employment.”

With the Leprino Foods facility under construction, JBS beefing up its sites and other potential employers sniffing around, there could be a trickle-down effect in the works that will see an uptick in office and retail as well.

Tom Reznik, a Realtec broker who focuses on the Loveland market, has been fielding more calls from economic development officials with users “kicking the tires” for large industrial spaces.

Ells said that industrial building will likely be the only activity in the next few years, due to a lack of industrial flex space. Rexel Inc., for example, looked for almost a year for an existing building before deciding to build its own distribution facility near Crossroads Boulevard.

Green shoots popping up

“We’ve got some industrial interest,´ said Steve Kawulok, broker with Sperry Van Ness.

All of the brokerage’s listed industrial properties are currently being considered by potential users ranging from local companies in the search for more space to international firms looking to enter the region.

“The green shoots are popping up,” he said. Most of the activity, so far, has been inquiry and planning for implementation in the later part of the year.

“We thought that distressed properties would have a bigger splash,” he said.

Sperry Van Ness has already sold two former New Frontier Bank properties – the Longmont branch on Main Street to IBMC and the administrative building in Greeley to the Weld County Library District.

Properties purchased with New Frontier loans are not having the impact on the market that was once feared, though. For the purchasers of the loans, the pain was already absorbed by the Federal Deposit Insurance Corp. The new investors have more wiggle room to restructure loans or, if they foreclose, to improve or hold onto the properties for a higher price.

“Distress is being eked into the market, so it hasn’t had a great influence,” Kawulok said.

It appears that bank-owned or regulator-sold properties aren’t having a large damaging effect across the country, either. Nationally, commercial property prices are improving. The Moody’s Commercial Property Price Indices increased 3.6 percent in May, following a 1.7 percent improvement in April. However, prices are still 38.9 percent below their peak in October 2007.

“There are some really good deals out there,” Reznik said. Bradley added that he’s seen some office properties sell for a fraction of the construction cost.

Low prices are starting to bring in investor interest. The well-watched “money on the sidelines” is finally jumping into major metropolitan markets, resulting in investor bidding wars.

“It hasn’t yet been demonstrated here except for a select few properties,” Kawulok said.

Investors sick of waiting

The brokers at Marcus & Millichap are starting to see signs of investor interest in Northern Colorado.

“The uncertainty really kept a lot of buyers on the sidelines,´ said Jason Ortiz. “My interpretation of what’s going on now is that there are a number of investors that are sick of waiting.”

The investment opportunities outside of real estate aren’t very attractive now, as rates on money market accounts remain low and the stock market continues to be a rollercoaster.

Ortiz is seeing investor interest pick up in the region, though not heavily. He has six investment deals under contract for various property types. Marcus & Millichap recently sold a Cheyenne, Wyo., property that received 13 offers in three weeks for above its listing price.

Financing, of course, remains a sticking point; around 85 percent of the offers Ortiz is seeing are cash.

Investment activity hasn’t hit the land market yet. North of Colorado Highway 7, where 930 land parcels are available, there have been only 11 market sales. At this rate, Kawulok pointed out, there is a 40-year supply of land. Values are so low that some property owners with the wherewithal to do so have stopped actively marketing to wait for prices to rebound.

Realtec founder Steve Stansfield feels that the commercial real estate downturn will be relatively shallow, recalling that during the recession in the early 1980s vacancy rates were as high as 30 percent.

“We don’t have that (huge inventory of empty buildings) now,” he said. He is cautiously optimistic about the rest of the year. “It looks pretty good for the next quarter in terms of pending deals.”

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