A vicious circle has all but shut down commercial real estate activity in Wichita. Commercial credit has dried up and property values are plummeting, making deals difficult, if not impossible.
Longtime Wichita commercial developer Max Cole puts it simply: "I'm lucky. I have cash. If you don't have cash, lots of luck getting a deal done in this town."
The common culprit is the lack of commercial credit. Banks, minimizing their exposure on commercial deals, are shrinking loan-to-value ratios, requiring down payments of almost half the value of a deal. That's a level of liquidity many developers don't have in a down economy.
But there's an under-the-radar culprit for the shutdown as well: commercial property values are plummeting as the market tightens — 35 to 40 percent nationally, according to George Ratiu, a commercial economist with the National Association of Realtors.
Some Wichita commercial brokers blame local appraisers for what they call "astronomical" value declines, particularly in multi-family apartment deals where cap rates — annual rates of return inversely tied to property value — have jumped from about 9 to 12.5.
But others say falling property values are emblematic of the struggling Wichita economy, with distressed property deals dominating the local market.
"If you look at our numbers, sales volume is way down, more than 50 percent," said Steve Martens, president of the Martens Cos., which brokers and appraises commercial property.
According to Sedgwick County numbers, there were 574 commercial deals here from Sept. 1, 2008 to Aug. 31, 2009. During the same time period two years earlier, there were 1,324.
"And today, many of the sales are distressed properties," Martens said. "A real estate appraiser typically is using historical information to analyze a market and a property to determine a value."
Call that analysis the search for "comparables."
"You're dealing with less demand and a heck of a lot of supply," said New Orleans-based commercial broker Richard Juge, the national president of the Certified Commercial Investment Broker organization.
"If you're an appraiser, you're trained to look at the facts. The facts are that nothing's going on or that the last sale was a fire sale. You can't blame them to a person....
"In recent years, we've weighted appraisals heavily on the market approach to justify prices going up. Now that we're going the other way, we're relying on the same market approach with the last sale showing an ugly picture."
Appraisers are evaluating property differently in the tight economy, Cole said.
"Never seen it like this before," he said. "I've got about 400,000 square feet here at Office This, and about 80,000 still vacant.
"They come in, capitalize your leases and away they go. They didn't even attempt to attach value to the vacant space. Never seen anything like it."
Stan Longhofer, director of Wichita State's Center for Real Estate, said that's because market conditions must be evaluated by appraisers and lenders.
"Yes, values are down significantly from where they were two years ago," he said. "As long as that's a fair reflection of today, that's appropriate.
"It's a lender's job to then decide that given current market conditions, here's what we think will happen in the future and then adjust their loan-to-value requirements."
The vicious circle hasn't escaped notice in the Wichita banking community.
"It all goes back to the down market and the conservative real estate environment," said Gary Schmitt, who oversees commercial lending at Intrust Bank.
"Nothing is occurring, and it sort of compounds itself because the lack of deals makes it even a little more conservative when the appraisals come out. They can't find comps, so they go back farther to find comparable sales. If there are any around here, they could be distressed. The result is valuations are lower."
Schmitt maintains the current commercial downturn must be viewed relative to the ease of credit access over the past four or five years.
"The competitive pressure that we had over the last four or five years was different," he said.
"I'm not sure our underwriting standards changed, but what changed was your competition coming in. They'd do the 90 percent loan-to-value when you wanted to do 80. So we end up doing the 90, but it's not our first choice."
An economic rebound is the solution to the vicious circle, Schmitt said.
"When we see the economy turning around, we'll get back in line," he said."... I think what you're seeing is that the banks are requiring the equity that we've always liked to have. It's definitely more of a return to normalcy, I think, than our people choking the real estate side.
"It'll never be the way it was two years ago, but the day is coming when we'll be able to get good comparables and we'll be able to structure deals that are beneficial for everybody."