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Industry Leaders Offer Perspective on Utah's Commercial Real Estate Market

The doom and gloom in the commercial real estate sector is not nearly as bad as it's made out to be. That's the perspective of Vasilios Priskos, principal broker and owner of commercial real estate firm InterNet Properties, Inc. He says the recent Commercial Real Estate Symposium held at the Salt Palace Convention Center felt more like a funeral than an industry pep talk.

"Utah's commercial real estate sector is not nearly as gloomy as one might think," says Priskos. "Part of the problem is the dam that's been put in place by lenders. We are still seeing market activity and we are still leasing properties. The difficulty is in obtaining financing for new projects or in refinancing."

In truth, he says, a lot of cash sits on the sidelines, but a lot of new interest in Utah exists.

Mark Bouchard, senior managing director in the Salt Lake office of CB Richard Ellis, offers similar sentiments, especially regarding market liquidity.

"The greatest impact on Utah's commercial real estate sector, as a whole, is the lack of liquidity in the market," he says. "We hear stories that banks are lending money again and that may be true, but the rules have changed."

What he means is that lenders have changed their credit rules and equity requirements, making it more difficult to access the cash that was so readily available during the boom from 2004 to 2007. Consequently, he expects minimal business expansion or new developments in 2009.

Mark Alexander, vice president of investment and office for Coldwell Banker Commercial, agrees. He says a number of banks have stopped lending money altogether for commercial real estate and he doesn't expect to see more liquidity in the market until the second half of 2009.

"There is still an appetite to buy, but until lending and underwriting restrictions loosen up, investors will generally sit on the sidelines," he says. "A few investors are willing to pay higher closing costs and accept higher interest rates, but that's the exception."

Alexander says interest in commercial real estate investments slowed during the last half of 2008, as investors watched and worried about what would happen in the market, but the phones are starting to ring again.

"Investors are anticipating, expecting, hoping for change, which has regenerated some interest," he adds. "I have full confidence interest will slowly grow and as we get into 2010 we'll see much better activity in the commercial real estate investment arena."

It is true that Utah's office market is seeing increased vacancies, which are expected to increase slightly during 2009, according to Bouchard. The retail sector is also being pressured, as businesses experience the negative impact of the economy.

"Some small businesses may not survive the economic hit," he says, "but most will and those that do will be stronger."

Utah's industrial market is still fairly strong and the commercial real estate sector is fundamentally sound. Nonetheless, Bouchard expects 2009 to be a year of transition -- not a great shift to the worse -- but not a great deal of improvement either.

"Everyone expects the markets will get better, but coming out of the recession doesn't mean the economy is fixed, it just means we have found the bottom. I don't expect the real growth to occur until 2010," he says.

That doesn't mean the phone has stopped ringing.

"We are still receiving a lot of interest from out of state businesses," Bouchard says. "People are looking for a place they can do business and be successful. Utah has a lot of great dynamics, the least of which is a very well-run state government. Utah also receives high marks for its stability and business-friendly environment."

Mike Lawson, CEO of real estate firm Commerce CRG, says he has never seen an economic situation quite like the current one, but adds that Utah went into the situation in a healthy fashion and will emerge significantly stronger than most states.

"Utah tends to lag the national economic fluctuations," he says. "We don't hit the tops or the bottoms of the national economy and we are going to come out of it okay."

Lawson says there will always be a certain amount of tension in the market. His advice to Commerce CRG clients is to keep planning for tomorrow.

"Utah has a pretty sharp business community in terms of strategic planning and there is no reason to stop planning now," he adds. "Opportunities exist, even in times of transition, within every specialty area of commercial real estate."

Lloyd Allen, NAI Utah Commercial Real Estate Service's senior vice president of brokerage services, recognizes the liquidity issues of the last half of 2008, but lends some interesting perspectives for 2009. He says investors had to be very cautions during the last six months because the data showed deals closing at cap rates in the six percent range. With the projected negative economic conditions, investors were not willing to take a six percent cap and so were sitting on the side lines. The last few months, however, have seen some higher caps of seven, eight and nine, and in one unique deal even a 10 percent cap rate.

"These types of numbers can encourage investors to go after opportunities that may begin to exist in the market," he adds. "These types of opportunities can bring money from parties that have not been the traditional financiers of the last few years. There is a sentiment that these types of transactions can create more movement in the market."

A few other noticeable changes in the market have occurred in the last few months, according to Allen. Industrial lease rates have begun a small move down, which was not seen late last fall. In the office market, owners are becoming more willing to make deals, even if they are not the terms that they had hoped for.

"Experienced brokers have said that they have been busier the last two weeks than they were the last two months," Allen says. "There is hope that all of these factors can keep Utah's commercial real estate market from seeing as significant of decreases as has been experienced in the residential market."

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