Commercial real estate competition intensifies

When Jim Alabach, director of leasing for the Kroenke Group, opened bidding on the initial construction of Hy-Vee stores at the old Wal-Mart sites in Broadway Marketplace and the Rock Bridge Center, three of the five competing contractors were from St. Louis.

While Alabach has worked with St. Louis contractors on Columbia projects before, it’s been in a partnership with a local contractor. The St. Louis company usually handles management, and a Columbia company handles the construction. The Hy-Vee construction was unusual, he said, because the St. Louis companies were bidding for the entire project.

“It’s almost like a bunch of vultures,” said Joe Snodgrass, Septagon Construction’s Columbia office manager. “When it gets tight, you get people coming in that you’d never seen before, and from distances you wouldn’t think would even be competitive.”

As the number of new commercial projects slows down, competition has become fierce, and contractors are worried that even some of the pending projects may be put on hold. And after a year of slow residential development, contractors who specialized in that area are now jumping into the commercial fray, driving prices down and leaving some subcontractors out of work.

While there are still commercial projects being built, and more planned, the number of commercial building permits (not including additions and alterations) issued in 2008 was less than half of the peak in 2006, and it was the lowest number in seven years.

Tightening underwriting standards have forced developers to sign more tenants to convince banks to lend, but most businesses have reduced their expansion plans. It takes more time for commercial realtors and agents to sign tenants, and residential agents short on work now dabble in commercial real estate. Landlords make more contractual concessions to get good tenants to sign on, and the negotiation process takes longer.

The commercial real estate environment is one of uncertainty, with banks, developers and realtors digging in and focusing on existing clients and locations.

“A lot of larger clients are just finishing up projects they had booked to go,” Little Dixie Construction co-owner John States said. “They’re finishing up what they had on the table in 2009, but not pulling the trigger on adding stuff.”

But there is good news. Commodity prices are down, making construction materials cheaper for contractors. And projects are still under way, particularly where infrastructure is being built in north and east Columbia.

States, a partner in the Crosscreek development at Stadium and U.S. 63, said he thinks some of the stores locating there could be breaking ground as early as late spring or early summer. Joe Machens Automotive closed on property there last month, and a Taco Bell, MFA Break Time and Landmark Bank have also closed on property, States said. Once construction on Maguire Boulevard is complete, extending the road through Lemone Industrial Park to Stadium Boulevard, “I think the other buyers will want to open up their doors at the same time,” States said.

With the work Little Dixie has seen recently, States is optimistic building will start picking up sooner rather than later.

‘A BUNCH OF VULTURES’
But until building does start picking up, contractors are digging in for a lull in activity. The number of contractors, general and subs, bidding on any project has increased significantly, and contractors have made adjustments in hours to compensate for the slowdown. But now, the uncertainty in the marketplace is such that contractors who have managed to secure jobs on new projects are not even sure they’ll keep them.
“The question is, the jobs we’ve successfully bid on, are they going to go?” Jim Fasciotti, a Columbia Glass job estimator, said.
Columbia Glass has gone from having four or five glazers bidding on a project to 25, Fasciotti said. And it’s not just subcontractors.
“General contractors are all concerned,” Fasciotti said. “When they miss a bid now, it’s bad.”
Snodgrass of Septagon said smaller subcontractors may even get to the point of diversifying their services. They may offer only drywall, painting and framing rather than just one of the services.
“The biggest difference between now and last year was you could look at the horizon and see projects,” Snodgrass said. “Maybe not right away, but in the next 12 months. Now you’ve got to be real aggressive to get projects.”
For projects without imminent deadlines, Septagon took the precautionary measure of asking some employees to field 32-hour weeks in January and February to make sure their workload stretched into March, Snodgrass said. That kept the Columbia office from laying anyone off. But not every Septagon office was that lucky, he said.
At Little Dixie, States said that while the company is down in dollar volume, there are still enough projects on their backlog to carry the company through 2009. The number of contractors bidding on jobs, though, is up 50 percent while the number of jobs is staying relatively constant.
While no one knows where the market is going or when building might pick back up, everyone agrees it’s an entirely new environment. And most people in the commercial real estate world agree that new building will remain low for some time. Speculative commercial building, especially, will not pick up until more of the existing inventory is absorbed. Many developers have plenty to worry about without starting new projects.
Craig Van Matre, a local attorney who represents developers, said many of them, after “riding high since 1992,” are looking at losing everything.
“Two years ago, I could have put a sign on this traffic light out here, ‘Anybody wants to make a 99 percent loan to value for a piece of real estate worth $10 million, line up here at eight o’clock in the morning,’ and there’d be 10 bankers in line there,” he said. “It’s completely changed, completely.”

ABSORBING THE INVENTORY
Now the Kroenke Group is showing two to three properties a week rather than the two to three properties a day it showed when the economy was booming, Alabach said. But Columbia is faring better than many communities. Because of a more stable job base, the city continues to be an attractive location for retailers. Alabach said he’s already heard from two or three tenants interested in leasing the space formerly occupied by Linens ‘n Things in the Shoppes at Stadium.
“We’re in roughly 29 states, and this market has always been good,” he said. “Steady, stable, consistent. It doesn’t ride the (high) ups and downs; the peaks and valleys tend to be closer to the center.”

Jay Lindner, vice president of Forum Development Group, said many users and developers are giving college towns like Columbia a closer look these days for exactly that reason. From an investment standpoint, he said, the market here is just more stable. Looking at what the market has absorbed over the past few years, he said, after the new Wal-Mart developments were finished, Columbia has fared well compared to the country.

National retailers’ expansion plans have been cut back significantly, and thus new developments have been put on hold. For instance, Forum’s Discovery development at the new Gans Road overpass, which they had hoped to begin moving forward in 2008, has stalled.
New leases now are going to mainly local or regional businesses, Lindner said. But with the financial markets the way they are, businesses openings will be scarce.
“Having the capital markets dried up like they have been the last year really makes it tough for a new business to go out and get start-up capital to do their improvements and buy their inventory,” he said. “That’s probably one of the bigger threats to commercial real estate in general.”

Bank of Missouri President David Keller said an increase in government guarantees for SBA loans could help small businesses, but there’s just not much demand for existing business expansion or construction of new office or retail space.

“The price of land, coupled with the cost of new construction, puts the rent requirement way above market price,” he said
Office space like that in the Buttonwood Business Center, where Bank of Missouri is located, is almost entirely occupied, Keller said. Businesses wanting to cut costs to the minimum can lease space there and not have to worry about hiring a receptionist or paying for equipment and maintenance. In the near future, he said, new leases and purchases will be focused on absorbing existing inventory.
“There’s just not much demand for expansion,” Keller said. “There’s still substantial vacancy in these new projects.”

In 2008 the total commercial vacancy rate decreased from 2007, according to Paul Land’s Commercial Use Report. Some sectors have absorbed inventory faster than others. Office and industrial vacancy rates decreased, but retail vacancy increased in 2008 and continues to be higher than the national rate. But that means more opportunity for real estate agents, Land said.

“Wherever there’s an imbalance, there’s an opportunity,” Land said.
John Hancock of Maly Commercial Realty said finalizing deals in this environment requires more good salesmanship, more phone calls and more evaluation.
“In terms of getting deals done, there’s still considerable interest in commercial real estate – investors, tenants, what have you,” he said. “But actually getting deals finalized seems to take more time. No one knows exactly where the market is going, and everyone is much more cautious on all ends of the deal.”

GLIMMERS OF HOPE
Premier Bank’s Columbia market President Steve Smith said activity in the market has been picking up in the last three weeks or so. While it could just be the return of nice weather, he said, long-term investors seem to be regaining interest in land that is cheap enough to buy and hold for a while.
“I don’t want to come across like happy days are here again, but it looks like the indications are that things are picking up, and hopefully it can feed on itself and continue to grow,” Smith said.

Scott Wendling, a realtor with H.o.B. Commercial Realty Group, a subsidiary of House of Brokers, said that 50 percent of the activity he’s seen in the last six months has been in the last 30 days. The Medical office sector especially, he said, has shown promise. Wendling, who is the only commercial realtor with House of Brokers, said he might need to recruit another commercial broker.

“My year has been going pretty good,” he said. “It’s exceeding expectations.”
Downtown property owner John Ott said the downtown area “is definitely holding its own.” He’s lost a couple of tenants recently, but he has also signed on tenants. Wilson’s Fitness Centers will be opening a location in the Berry Building, and creative retailers and restaurants are benefiting from the proximity of the university and more people living in the area, he said. The proposed Trittenbach development, planned as a mixed-use commercial building at Tenth and Locust, is an important project, he said, because it will allow more people to live downtown, increasing its overall vitality.

“As the population grows, more and more people appreciate the urban center and take advantage of it,” Ott said. “It’s had its ups and downs, but right now it’s trending favorably.”

Hancock said activity will follow infrastructure and transportation improvements. For instance, the Providence Road extension to Blue Ridge is part of David Atkins’ plans to develop a shopping center anchored by a grocery store. Moser’s grocery will soon be opening, filling a void in grocery stores on the north side of town, Hancock said. And as MoDOT completes the Range Line Street improvements, the accessibility and transportation efficiency will drive even more real estate deals in that area.
“I think you’re going to see some things happening when the roads get done,” he said. “I’ve always been a big believer in North Columbia.”
Hancock said there are still companies looking at Columbia every day for expansion opportunities; there’s just not the rush to open a store that there was a few years ago.
“I still think Columbia’s one of the top markets in the Midwest, and I’ve got pretty good faith in it,” he said.