Think 2011 for commercial sector recovery

Think 2011 for commercial sector recovery
Economy » Retail rebound likely to precede that of multifamily, industrial real estate, conference speakers say.

By John Keahey
The Salt Lake Tribune
Updated:02/09/2010 07:16:42 PM MST

The massive City Creek project might be on target for completion in 2012, but that's not soon enough to bounce the Salt Lake Valley's commercial real estate market out of the doldrums this year.

"I'm skipping 2010," Michael Morris told several hundred commercial real estate executives meeting in Salt Lake City Tuesday morning, emphasizing 2011 should be significantly better.

The Zions Bank executive vice president's comment got a laugh, albeit a nervous one, from those attending the 16th annual Utah Commercial Real Estate Symposium.

Morris told attendees that inventories of leasable space are expected to increase and pricing per square foot will continue "to get pushed down." But as the year progresses, he noted, some commercial sectors will start a slow rebound.

"Multifamily housing will get financed first" as banks start loosening up their lending, he said. And retail, which was the first sector to get slammed hard when the recession starting mounting in Utah in mid-2008, could also be among the first to rebound, he said. Next in line will be the industrial leasing sector.

Other speakers at the morning-long symposium echoed Morris' outlook.

Wesley Cornelison, a principal in CB Richard Ellis, thinks 2010 likely will bring "flat to slightly negative growth" in the office sector of commercial real estate. He expects "it will take several years to work out office space inefficiencies once job growth starts to rebound."

As for lease rates, landlords will "compete for fewer tenants ... and [rates] will experience downward pressure."

A bit of good news for commercial leasing companies -- though bad for construction firms -- is the reality that "speculative office construction is not expected in 2010," he said. That's because 559,771 square feet of newly constructed office space came online during the past year, led by completion of 222 Main Street in downtown Salt Lake City encompassing 426,671 square feet within 22 stories (no 13th floor).

Some of that space will be filled this year without the pressure of new projects, he said.

Vacancy rates throughout the valley are at 17.2 percent, a dramatic increase from 13.7 percent at the end of 2008 before the recession started to hit with a vengeance in Utah.

But it's going to take some time to get that bigger number down, Cornelison said, noting that companies would have to create more than 12,250 jobs in order for that figure to come down to 9 percent.

"We're all under water," he told his colleagues. "But there is no reason to panic. The surface is right above us."

Troy Hardy of Coldwell Banker Commercial took attendees down memory lane in his talk about the retail segment. He picked 2007 as "arguably the best year in the history of Utah retail ... lease rates climbed substantially and vacancy rates dropped to near negligible levels."

And major players, such as Walmart, Target, Home Depot, Costco and Starbucks, "continued aggressive expansion plans statewide."

Then, "a crack appeared" in 2007's fourth quarter.

"Since retail follows rooftops, it wasn't hard to see that 'the darling of Utah's commercial real estate market' would misstep with the residential meltdown of 2008," he said.

His prediction for 2010 is that evidence of a rebound "may be hidden from view during the first two quarters, [but] retailers will slowly come out of hiding and ultimately, as consumers spend, residential rebounds and unemployment stabilizes, the retail segment will again become the darling of commercial real estate."

jkeahey@sltrib.com

Economic tidbits

In his speech Tuesday at a commercial real estate symposium in Salt Lake City, Zions Bank's Michael Morris tossed out these bullet points in discussing the residential and commercial markets:

Mortgage debt nationwide totals $10.5 trillion.

Twenty-three percent of Americans owe more in mortgage debt than the value of their homes.

The mortgage delinquency rate in the U.S. is 8.1 percent.

By December 2009, 697,026 Americans modified their mortgages, saving an average of $550 a month in payments.

Commercial debt nationwide totals $3.5 trillion.

$1.4 trillion of that debt will mature in the next three years.

Banks hold a majority of commercial debt, $1.6 trillion.

Commercial property values nationwide are down 43 percent, to 2002 levels.

There have been 150 bank closures since the downturn began, with another 300 to 500 expected.