Real estate bust affects everyone

Evidence of the worst recession in decades is apparent in almost any direction around Kootenai County.

From the northern routes along Government Way to the midtown thoroughfares in Post Falls and Coeur d’Alene to the waterfront retail centers along the Spokane River, empty storefronts and offices dot the real estate landscape, mirrored in strip malls and commercial spaces throughout Idaho’s Panhandle.

The vacant spots are some of the more visible indicators of the so-called “Great Recession,” where mom-and-pop shops and commercial retail chains alike have run into tighter pocketbooks from customers and stricter lending regulations from banks. Many smaller banks, hard hit by the housing market collapse in recent years, have been forced to rein in or cut credit lines once readily available.

While new developments continue to spring up, the retail vacancy rates are not expected to improve significantly any time soon, small business loan professionals, leasing agents and real estate experts agree. When the residential building boom fell flat several years ago, it took a while for the commercial sector to show similar symptoms.

Now it’s slowed to a crawl.

“There is a large vacancy in terms of commercial property,” said Hope Realty owner Paul Sohrweide. Although he specializes in the residential market, “there is still a lot of supply on the commercial side,” he said, with about 300 retail and office listings for sale on the Kootenai County MLS database. “There’s an oversupply of space right now”

In the real estate market, commercial properties are often broken down into different industries. The high-value spaces, known as Class A properties, include high-traffic areas along Sherman Avenue, medical centers and some office warehouses, while the lower valued areas, called Class C, include strip malls farther from the heart of urban areas, inside many malls across the region, and even some high-profile sites such as the Village at Riverstone.

“The prime places are still going strong,” said Sohrweide.

Other areas haven’t fared as well.

The Class C retail spaces “are hurting the most” because of the crumbling commercial industry, according to Bob Beck, Mountain West Bank senior vice president and the area’s top U.S. Small Business Administration lender. The reduction in property values has been as much as 30 percent in some buildings, whereas much of the Class A type have seen drops of roughly 5 to 10 percent, he said. “The availability is more and more so rents are going down, so therefore it drives the value of that commercial real estate down as well,” Beck explained.

Few businesses are immune to the shaky economy, he added. The services provided by a business also are deciding factors. A new dentist office moving to town will probably find more success than a store selling fixtures for homes, especially in the all-but-collapsed housing market.

“There are certain industries, even in downtown Coeur d’Alene, that have been hit,” Beck said.

However, some of those property value reductions are a result of prices returning to a more reasonable rate, Beck noted. They come from a rate, he said, “that was, I would almost venture to say, superficially inflated.”

Another problem for landowners, Hope Realty’s Sohrweide said, is retaining tenants. With so many options available to business owners, and with property prices per square foot dropping off, “the retention is probably as important as filling empty space right now,” he said.

But there are silver linings even in depressed times, said Beck. More retail and office spaces have resulted in lower rents for tenants and some great opportunities for developers, while there are encouraging long-term outlooks for new businesses in the medical field and some other industries.

“Sometimes recessions do create opportunities,” he said, adding that he believes the economy is beginning to recover. For example, a new start-up can move into a newly constructed office without making many changes for almost the same price – maybe even less – as moving into an older building that needs to be fixed up first.

Janette Jerauld, owner of Eclipse Traffic Control and Flagging in the Warren K. Industrial Park, has felt the pinch of the economy in recent years. While 2010 has so far been a good year for her business, 2008 was a different story.

“In 2008, that was our recession,” said Jerauld, who relies on a line of credit from Mountain West Bank to bid on federal and state road construction projects. “That was the first time in 12 years of business that I had to let some of my employees go.”

Jerauld’s shop is surrounded by several empty office buildings in the park, and she’s seen a few businesses come and go since moving in three years ago. About the possibility of loans drying up, she said, “it’s kind of scary to know that if the lines of credit stopped, so do some of our projects … I think the biggest challenge as a small business owner is getting the money. Some people might not think $5,000 is very much, but it’s a significant amount of money to us.”

The recent vote by the Senate to extend a host of federal programs should help free up some much-needed credit for small businesses, said Beck of Mountain West Bank. The $10 billion package extends through the end of March a no-fee lending program, where 90 percent of small business loans are guaranteed by the federal government. That access to capital is crucial for many business owners, particularly in a time when small banks are in credit-crunch mode.

“If those lines of credit are pulled, these small businesses are going to have a very difficult time,” Beck stated, adding that after March 28 the guaranteed rate will probably drop down to about 75 percent, and businesses will have to pay a 3 percent fee. “Small businesses need to preserve as much liquidity, or cash, as possible. They can’t afford those borrower’s fees.”

The recently approved measure is good news for many business owners and small banks, Beck added.

“Credit markets, don’t kid yourself, are still very tight. The credit crunch is currently still going on. Banks in general, as an industry, are going through tough times,” Beck said. “But this will help many small business owners keep their doors open, at least for now.”