For several months, commercial real estate appeared to be the local industry hardest hit by the recession. That is improving somewhat, area experts say, with some neighborhoods doing better than others.
Perhaps the best news is that it isn’t worse. Widespread commercial foreclosures were predicted just when the residential real estate market would be improving, but that hasn’t occurred.
From a Realtor’s perspective
For the average Realtor or landlord, however, not much has changed since the depths of the recession, said Jan Wilking with Commerce Real Estate Solutions, an affiliate of Cushman Wakefield.
Rental and vacancy rates are much the same as they were two years ago.
“Rent is about as low as you can go,” he said.
Sales of buildings continue, but values are dropping, he added.
“Overall, there is certainly more optimism and purchases are happening, but look at the national economy: there are reasons to be pessimistic that are scaring off potential buyers,” he said.
Banks are being patient with hard-working building owners. If lenders believe an entity is doing a good job keeping a building full and bringing revenue in, lenders appear more willing to work with them rather than foreclose.
In the retail sector, this is a good time of year because businesses want to move in to shopping areas in time to be open for the start of ski season.
Unfortunately, there about as many businesses closing as new ones wanting to come in, so overall vacancy rates aren’t improving much, he explained.
The neighborhood with the highest vacancy is Prospector. The lowest vacancy rates are on Main Street, he said.
From landlord’s perspective
Main Street landlord Mike Sweeney said his own tenants appear to be doing well and are experiencing five-to-ten percent more business than last year, but it’s still a tough economy.
He’s aware of several others on the street, particularly galleries and pubs, who are struggling.
Sweeney said his units are staying full because he offers the lowest rates he can. He’s noticed neighbors are having trouble staying full, though.
Tenants have been pressuring landlords to lower rents, but tenant turnover is still high, he added.
According to the news he reads, another recession is likely and possibly worse than the one three years ago.
“I don’t think we’ve seen the total impact of the U.S. economy in Park City,” he said.
Sweeney also agreed with Wilking that building prices are way down. Most on the street are undervalued, he said, yet only one or two people are buying them, and they’re not getting bargains.
Still, people want to own real estate and do business on Main Street.
“I believe there is pent-up demand,” he added.
As evidence, he cites interest in constructing new buildings on the parking lot adjacent to the Wasatch Brew Pub and renovating existing structures.
There’s also pent-up demand to be on Main Street, he said. Businesses always inquire about vacant units.
Still, Sweeney said he feels like a yo-yo with optimism waxing and waning with each new prediction.
The retail center farthest from Main Street is Quarry Village. Bill Perry, managing partner with the new owners of the center, said it’s been a mixed bag. Some tenants are doing better than others.
“What we did is act more proactively and had meetings with tenants and made some rate adjustments,” he said.
Office space in the Basin tends to fare better than retail.
Jeremy Ranch landlord Debbie Sanich co-owns Toll Creek Village buildings two and three.
She said her buildings benefit from the close proximity to Salt Lake City. She wouldn’t be surprised if developments closer to Park City were not doing as well.
She had to lower rates and shorten the duration of leases to fill up, but has stayed full.
“We’re full and pleasantly surprised and very pleased. It’s a tough market right now,” she said. “The people we do have seem to be doing well.”
Another attribute is the size of the units. They can be subdivided or combined to accommodate different-sized businesses. That flexibility makes the spaces easier to fill, she said.
She’s seen some offices start out small and then request more space as the business grows. That has helped minimize vacancies, she added.
She did get some help from her lender. The final building was not completed until 2009 and sat vacant for seven months during the depth of the recession.
“But our lender worked with us and deferred interest until we could lease it out. Lenders don’t want the building back,” she said.
The commercial real estate market could be worse, however. During the recession, experts predicted a commercial crisis akin to the home crisis, just as recovery was getting underway.
Commercial mortgages have a much, much shorter life than residential mortgages five years is common. That means lenders who gave money during the peak building years in 2006 and 2007 are expecting a full return by this year and next, leading some to predict massive numbers of foreclosures.
From an analyst’s perspective
Michael Morris, executive vice president for real estate at Zions Bank, said concerns about maturing commercial mortgage debt and the subsequent effect on values through possible forecloses has abated.
Unlike some residential lenders, banks have been slow to foreclose on commercial buildings, preferring to extend the life of the loan, he said.
Even if the mortgage was securitized, investors are still receiving a decent, albeit smaller, return, he explained.
Commercial properties are devalued, but the drop is not as drastic as other investments, he added, so commercial real estate is still seen as a safe investment.
“It’s not half bad,” Morris said. “If you’re looking for a safe haven for cash and you don’t like (Treasury) bills and gold.”
If a homeowner loses a job, their income to pay the mortgage declines 100 percent. If a commercial landlord loses a few tenants, they can still make 60- to 80-percent of their payment.
Another factor that’s helping is the availability of new loans to keep commercial real estate changing hands. Banks want to lend money to continue adding yielding assets on their books, he said, so they’re finding ways to make money available.