Commercial market expansion: growth hampered by lack of money.

• Author: Browning-Hess, Teresa
• Position: Salt Lake City, Utah

COMMERCIAL MARKET EXPANSION

Growth Hampered by Lack of Money

"It is the best of times, and the worst of times." Roger Boyer, chairman of the board of Boyer Co., the state's largest development firm, chose Charles Dickens' enduring words to describe the commercial real estate climate in Utah today. It is good, in terms of opportunity to make deals on distressed or troubled properties, but it is plagued by one immutable factor--a lack of available financing that is changing the face of commercial real estate nationwide.

Vibrant Growth Period

The overall improvement of Utah's economy over the past few years is evident in all three of the commercial real estate market's primary disciplines--industrial, office, and retail. Out-of-state companies, which have selected Utah for major expansions, and significant growth in local businesses have done much to diminish the widespread vacancy created by overbuilding in the mid 1980s.

The new development that usually crops up to meet demand, however, has been severely limited by lending conditions that have become more stringent than any time in recent memory. The savings and loan crisis--coupled with belt-tightening by banks, insurance companies, and pension funds--has brought speculative building to a virtual halt and placed major obstacles in the paths of even preleased projects.

Ironically, the financing crunch comes at a time when downtown Salt Lake City is experiencing one of the most vibrant periods of commercial construction in its history. Two new office high-rises, One Utah Center and the Broadway Centre, will bring approximately 650,000 square feet of additional space to the central business district when they are completed this year, and downtown is ringing with the sounds of construction on projects ranging from the Jazz Arena to new parking terraces at the Triad Center and Exchange Place.

According to Commerce Properties' Richard H. Nordlund, project manager for the Broadway Centre, the office market is experiencing an upswing in activity with an increasing number of companies looking at new space and expressing an interest in moving.

"We're seeing more and more people coming in from out of state, particularly legal and financial firms," he said, adding that much of the market's velocity is also being propelled by tenants seeking image upgrades through moves to a higher-class building.

Financing Gets Tougher

The Broadway Centre, currently under construction, has leasing commitments for 40 percent of its space. The project began with equity funding, but when the limited partnership developing the building saw its construction loan fall through, more than 200 lending sources were explored before the group was able to obtain financing through the International Brotherhood of Electrical Workers Pension Fund, Nordlund said.

"It held up the building at least a year--during that period banks had completely pulled back, and very few projects were being financed in any part of the country," he observed. "Now, and in the future, developers will have to put more equity into their buildings, and more space will have to be preleased before they can be financed."

In fact, buildings have to be 65-75 percent preleased before they are financeable, said Greg Gunn, office leasing specialist for Consolidated Realty Group. "The most...