Tepid forecast for commercial real estate

It's an ominous sign for the 2010 Wichita commercial real estate market when local experts quote "The Gambler," Kenny Rogers.

"You've got to know when to hold 'em and know when to fold 'em. Know when to walk away and know when to run," local broker Steve Martens said Thursday at the annual Grubb & Ellis Martens Commercial Group forecast, held this year at Intrust Bank Arena.

There will be good projects worth completing as the economy strengthens, said Martens, president of the commercial group.

But the looming glut of commercial loans requiring refinancing "has people uneasy," he said. Tighter and irregular national credit standards are pinching commercial markets.

"I think that the local bankers would tell you they'd like to refinance them," he said. "It's the regulators, though, that hold the wild cards. Until we get to the point where we know what the signals really are, it will be tepid for 2010."

Opportunities exist in the uncertainty: Retail tenants have almost unprecedented leverage to negotiate better deals and cut-rate distressed property buys are out there for investors.

Still, it's hard to get past the financial and economic uncertainty, Martens said.

"I don't care what index you want to look at, it just isn't good," he said. "We've made a great move since the bottom economically, but we're nowhere near where we were three years ago.

"People are still losing jobs, admittedly not at the rate they were before, but we're still in a negative situation. The unemployment rate tells us the challenge."

The 2010 Wichita area forecast includes:

* Office — Vacancy rates will rise to more than 22 percent in 2010 as about 150,000 square feet of vacant space is forecast to go onto the market.

About 250,000 square feet of office space was vacated in 2009, a 20.3 percent vacancy rate.

Overall rental rates fell about $1.22 per square foot in 2009, and should continue to fall.

"Essentially, what we gained through the economy in '07 and '08, we gave back in '09," Martens said.

* Industrial — Vacancy rates should continue to rise as aviation companies and subcontractors consolidate facilities, with a projected 400,000 square feet of industrial space going on the market in 2010.

Vacancy rates should rise to about 6.4 percent, Martens said — below the 7.5 percent peak in 2004 but well above the 3.9 percent vacancy rate in 2007.

Any construction will be limited to owner-occupied or build-to-suit projects on the heels of 2009, when 1 million square feet of planned industrial construction was stopped due to the economic slowdown.

* Retail — Strip center vacancies skyrocketed to nearly 58 percent for facilities built since 2008.

As a result, only five strip centers were completed in 2009, down from 15 in 2007 and 12 in 2008.

Rental rates declined 7 percent in 2009 by an average of $1.18 a square foot.

As a result, strong retailers will have opportunities in 2010 to upgrade spaces and national retailers should begin to reposition stores in Wichita to high-traffic corridors like the north ends of Rock and Maize Roads and Derby.

* Investment — Most of 2010's sales activity will be distressed properties with upside potential, with demand highest for multi-family complexes with between eight and 24 units.