Tue January 5, 2010
Tough Recession Comes Late to Commercial Real Estate
Kansas City, MO – Ask just about anybody in the commercial real estate field in Kansas City how business has been affected by the recession, and very early on, they will emphasize that the market here has not been affected as severely as in some other cities.
"In Kansas City, it's very consistent, very conservative," says Ken Block of Block Real Estate Services, LLC. "I mean... we're getting our own lumps. Our retail is shut down. And our office is less than what it would have been in terms of occupancy two or three years ago. But we're not getting destroyed."
Block's company was number one in November, according to the Kansas City Business Journal, controlling 18 million square feet of leasing space in the area.
Block says Kansas City was not as "overbuilt" as some communities - particularly those with large tourist and retirement economies. And he says major developers here make caution a habit, paying attention to loan terms and interest rates and avoiding borrowing too much of the total value of a project.
But he adds, "I will say this - our business is down, and if I didn't I would be.... fooling you. But where other businesses are down maybe 40 to 50 percent, we're down maybe 15 to 20 percent. But it's still tough, I mean we've got to work a lot harder."
Rob Roberts, who covers commercial real estate for the Kansas City Business Journal, looks at that office vacancy percentage from a different perspective.
"Everybody I talk to says that we're going to hit 20 percent next year," he says. "Think about that. That's one in every five office spaces dark right now, or will soon be in Kansas City."
Roberts says with vacancies up, potential tenants to fill the offices down and rents declining, the number of distressed and potentially troubled properties is increasing dramatically. A study released last month by Real Capital Analytics says $450 million worth of commercial property in the Kansas City area is on the financial edge, and another $665 million worth could soon be in that condition.
"It's going to lead to some bankruptcies," comments the veteran business reporter. "It's going to lead to some bargain prices if you have cash or a source of capital. And a lot of people think that this is going to continue at least through next year and into 2011."
The problem is compounded by forecasts that already declining property values may dip another 20 percent or more. Roberts says the crisis comes when loans are due or refinancing is necessary. He uses a home mortgage example:
"Say you have a $250,000 fixed rate mortgage and all of a sudden that house is now worth $200,000. And your banker says, 'Hey, you either pay this $50,000 difference or you're going to lose your home.' Building owners are facing similar kinds of crises right now."
David Zimmer of Zimmer Real Estate Services, the sixth most active commercial real estate firm in Kansas City, calls the type of crisis Roberts is talking about "event-precipitated."
"The event would be the refinance, and they wouldn't be able to refinance it, or in order to refinance it they would have to bring a lot of cash to the closing table," Zimmer says. "And some borrowers could do that. Other borrowers might not be able to."
Zimmer, Block and Roberts all agree there will be foreclosures, despite the fact that lenders, not eager to own more real estate, will be willing to negotiate with some of the owners in trouble.
Commercial construction was the last activity to suffer beginning last summer. Twenty or more major projects are now delayed, postponed indefinitely, or shut down, leaving construction workers idle.
Mark Nidiffer, business manager for Construction and General Laborers Local 1290, says the average working member of his union was logging 1700 hours a year two years ago. This year, that is down to about a thousand hours - a 40 percent pay cut.
His expression is somber as he comments, "It has affected our guys in every way... been with the laborers' union for going on 35 years and I have seen a couple of slow times, but this is the toughest devastating downturn I have ever seen."
Nidiffer says health care is one of the largest issues for the construction union members, "because our health care is generated by so much per hour per member per week. We do have a health care hour bank, per se, but but a lot of our our members have completely depleted those hours due to lack of work."
Opinions how long the commercial real estate slump will last range from a year or so to three years. David Zimmer doesn't think retail will ever be quite the same.
"I don't even know to guess on the retail because I think the whole face of retailing is changing," he says. "People are more inclined to buy things off the Interntet today and have it delivered to their homes as opposed to going and shopping in the stores. There's just a lot of square feet of vacant retail space out there that I think it will be a long time before it gets stocked up."
The situation in commercial real estate parallels the overall economy. It just arrived later, and the possibility of a mortgage meltdown has not yet passed. Local 1290 president Carlton Young says the timeline just can't be forecast, and the frustrations are real.
"Right now and for our nation as a whole, till we come out of this, a lot of us are going to suffer behind it," he says.