Tight financing, low demand, Commercial real estate market remains sluggish

Only four months after winning City Council approval of tax increment financing for their downtown development project, brothers Nathan and Jon Odle decided to scale back their ambitious plans.
Despite spending thousands of dollars and countless hours wading through Columbia’s first test of the development tax incentive, they swapped their plans for an eight-story, mixed-use building for a four-story apartment building.
“We had to get TIF to make the (mixed-use) project viable,” said Nathan Odle, who owns Trittenbach Development with his brother Jon. But the smaller project with no commercial space “was more viable without the TIF.”
The Odles’ decision illustrates the dynamics of the current commercial real estate market. Owners of retail and office space are facing low demand while apartment rentals are strong as people put off purchasing homes.
The U.S. Commerce Department reported that commercial construction dropped 32 percent from January 2009 to January of this year.

Columbia is taking its lumps just like the rest of the country. Commercial construction spending in 2009 dropped 26 percent from 2008. And of the commercial construction spending in 2009, 38 percent was on additions and alterations rather than new buildings. Only one office building was constructed in 2009, compared with six the year before. The construction of new stores dropped from 12 in 2008 to four in 2009.
At the Commerce Trust Company’s annual Investment Summit in early February, the Commerce Bank division’s chief economist, Scott Colbert, called the commercial property market a “slow-moving train wreck.”
“This commercial real estate market will continue to be a drag for years and years and years,” he said, warning of the high amount of commercial debt expected to come due this year.
Just looking at the local legal notices, Columbia is already starting to see companies losing land or frantically working to refinance. In early February, some of Forum Development Group’s property on U.S. Highway 63 and Gans Road was listed for a foreclosure sale after a mixed-use development there stalled when the financial crisis peaked. Forum owner Jose Lindner said the company worked out a refinancing agreement with its lender, Bank of America. But that didn’t stop about a dozen people from showing up at the scheduled auction and looking for a bargain.
David Keller, president of The Bank of Missouri in Columbia, said he expects some large land conveyances from borrowers back to lenders this year. But banks are working with owners of commercially zoned property to give them more flexibility in their financing agreements, Keller said.
“The most toxic asset in a bank right now is a loan on vacant land for commercial development,” he said.

In October, federal financial regulators issued new guidelines to give banks more room to work with commercial real estate borrowers struggling with lower property values and searching for tenants. Keller said regulators began cautioning banks that their commercial real estate ratios were approaching dangerously risky levels about five years ago.
“Many banks did not heed those concerns,” Keller said. “Bankers, not unlike any other business, go to where the action is, and that’s where the action was.”
Columbia, like many places, was in the midst of speculative boom, the full effects of which are still to come. It was common for lenders to finance the full cost of land purchases that could be quickly flipped for a profit. Now many borrowers are overleveraged, sales volume is low, property values are being downgraded, and banks are facing much tighter regulatory scrutiny.
Local attorney Craig Van Matre said that despite lower loan volumes at banks, their profits are higher than they have been in years because their borrowing costs are negligible.
However, several developers in town are struggling, “to put it mildly,” he said.
“There is an enormous amount of conduit debt that has to roll over this year, and no one knows how to handle that problem,” Van Matre said in an e-mail. “I talk to people about this every day. If a borrower can’t show that he really doesn’t need the money, he can’t borrow new money.”
To get financing for a commercial project now, banks are demanding borrowers put in 20 to 30 percent equity for a loan and have most of the tenants lined up, Keller said, and there are almost no speculative commercial projects being financed anymore.
“The days of figuring it out as you go are much less likely to continue,” said Steve Smith, Premier Bank’s former Columbia market president.
Premier Bank’s troubled commercial loans landed it under federal supervision and put Smith out of a job. But the value crash on land will make some people “a lot of money,” Smith said.
“If someone can buy a property and hold onto it for five years, they’re going to do just fine,” he said.
Travis McGee of Certified Realty Inc. said the biggest obstacle in the market right now is financing.
“There are buyers out there, and there are definitely sellers, but financing is tough,” he said.
John Hancock, a broker with Maly Commercial Realty, said the difficulty tenants have securing financing makes closing a deal a much longer process. And the weak economy and low demand has forced down rents, he said.
“It still takes a lots of hard work to finalize a transaction, be it a lease or a sale, just because everyone’s due diligence requirements have increased,” Hancock said.
But he has started to see some signs of improvement, he said. Large national chains that slashed expansion plans during the height of the recession are starting to look for new locations again. In the past four months, he’s seen more sales and leasing activity.
“It’s much better than it was at this time in 2009,” he said.
Specific-use buildings will probably be the main construction projects for a while, Hancock said, and speculative projects and raw land sales will remain very slow. Although he would like things to pick back up, Hancock said the market has slowed down to a more normalized rate of activity.
“There’s enough empty space out there that it will take a couple more years to fill all that up, and then maybe we’ll start seeing some new buildings,” Hancock said.
There are still new buildings being constructed, albeit very few. Steve and Scott Wendling expect to open the first building of their Providence Village project in April. The area has plats for 11 commercial and office buildings at the intersection of Providence and Green Meadows. They’ve already leased one office to local dentist Dr. Dan Lavitt. Medical space, relative to other market sectors, is one of the few healthy spots in the commercial real estate market, Scott Wendling said. The Wendlings expect to start construction on the other buildings as they find tenants.
“In this market, you’re not going to put anything up until you’ve got someone leased,” Scott Wendling said.

When the Wendlings started the project, they were in negotiations with QuickTrip and CVS, but the large chains pulled out after slashing their expansion plans.
“It’s going to take a little bit of time, but people are starting to open up to the idea of expanding again,” said Shawn Priesmeyer, a Realtor with H.O.B. Commercial Realty that’s involved with the Wendlings’ project.
But the shakeup in the market does lend itself to new opportunities for rising players in the local market. Trittenbach is finishing up building at its Brookside Townhomes complex in south Columbia and hopes to be finished with its 16-unit apartment complex in downtown Columbia by August.
“There hasn’t been new housing constructed downtown in many, many years, so it’ll kind of be a little bit of a barometer,” Odle said. “The key to stabilizing downtown is getting residents there.”
For the Odles, the recession hasn’t been that bad because their niches — apartment complexes and medical offices — have held up during the down economy. Plus, the tighter lending environment will ensure that projects that do get financing and are built are more viable and better constructed, Odle said.
“You make your money in a down market.”

Parking lots of glass

Those who remember Providence Village for the hours of debate about protecting a stand of trees between the construction site and nearby residences might be surprised to learn that the project is experimenting with environmentally friendly paving.
Steve Wendling’s new office building at Providence Village, which Wendling expects to be finished by April, will have the parking spots paved with Filter Pave, a porous paving material made from recycled glass. The material absorbs chemicals such as oil in stormwater runoff that would usually seep into the stormwater system. And because it is porous, it eases the burden on the city’s stormwater system by slowing the flow.
The material is about 30 percent more expensive than traditional asphalt, but it can pave more space with less, Wendling said. Plus, the porous pavement makes it easier to comply with the city’s stormwater regulations. By using the new paving material, he won’t have to build retention ponds on his Providence Road site, which gives him more space to develop.
Wendling is considering becoming the local distributor and contractor for the material. If he likes how the material works when it’s in his parking lot, he plans to open an office at Providence Village to begin distributing the material locally.
“The first thing is to determine whether it works, and I’m about to spend $50,000 on an experiment here,” Wendling said. “But I wouldn’t spend the money if I didn’t think it would work.”