Commercially sustainable?

COEUR d'ALENE - The real estate adage that "commercial follows rooftops" meant a surge in retail and office space development in North Idaho, but when the roof fell in on the housing market, the commercial sector was close behind.

"Retail was the worst sector of 2009," Mike King, real estate agent for Coldwell Banker Coeur d'Alene Realty, told about 500 others in the industry at the 2010 Real Estate Market Forum held at the Spokane Convention Center on Feb. 25.

Vacancy rates soared in the past few years, yet development continues. With the continued operation of Walmart in Post Falls, plus two new stores there and in Hayden, Walmart alone will have 413,000 square feet of retail space - 15 feet for every man, woman and child in the county, King said.

Nationally, among the top 62 markets, the average per capita retail space is about 45 feet. In Spokane it is almost 64 feet, and in Kootenai County nearly 81 square feet.

"How is this sustainable?" King said.

Some of the region's major retail malls are seeing record levels of vacancy. General Growth Properties, which owns the Silver Lake Mall in Coeur d'Alene and the Valley Mall and Northtown Mall in Washington, is facing major tenant loss.

Retail spaces, particularly malls, are seeing huge vacancy rates in "inline" stores, the small non-anchor spots. Silver Lake Mall is at 33 percent as General Growth Properties negotiates with several prospective buyers.

"They need a buyer who can infuse major capital into those old malls," King said.

Other commercial spaces are also seeing increased vacancies, said Casey Brazil, branch manager of Kiemele & Hagood Co. in Coeur d'Alene.

From 2008 to 2009, vacancy rates for office space in some parts of the county showed a decline, but Brazil questions the validity of those statistics, which show Coeur d'Alene at 6 percent vacant in 2009 compared to 10 percent in 2008.

"Kootenai County is tough to explain," Brazil said. He believes there is a "shadow market," of tenants subleasing their space.

The office market, he said, is "more scandalous than Tiger Woods."

But Brazil believes mid-2009 was the bottom of the market. That is partly because increased vacancies mean more landlord concessions. Space that had leased for $20 per square foot, triple net, has been going for $6 to $7.

He also believes it will be a while before investment activity resumes, and that will keep the market flat.

"If you've got cash, now is the time to purchase," he said.

The market is even worse in the Spokane Valley, where the new Riverview Corporate Center, with 250,000 square feet, is only 10 percent leased. That has meant developer Walt Worthy offered a year of free rent for a five-year lease, Brazil said.

And that is bad news for other landlords.

"Wow," he said. "If I'm a landlord with a renewal coming up, my tenant is going to want a free year."

In all, Brazil said, 2009 was not as bad as many thought.

The bottom line for Kootenai County office space, he said, is that rent will go down, concessions will increase, vacancy rates will increase, cap rates will rise and investment activity will decline. The market will stabilize by the end of this year, he said.

Financing will continue to be a problem, said R. Terry Neal, vice president/relationship manager for U.S. Bank.

"Investors will return when it is the right time to buy," he said. "2010 is probably not going to be that time."

While banks try for 1 percent delinquency rates, residential loans have been running 10 percent, and commercial rates 5 percent, Neal said.

And while "conduits," institutional investors, are being conservative, leaving banks and credit unions to shoulder the burden of commercial financing, "there will be equity money coming into the market," he said.

There are more large projects coming online this year, King said. Loves Travel Stops is expected to begin construction on 10 acres in the Expo project in Post Falls, where Walmart is under construction. Earth is moving at the nine-acre site at Ramsey Road and Appleway Avenue where Winco plans to open a grocery store.

Where will the people necessary to support those operations come from?

In Post Falls, 48 percent of traffic is from out of the area, and that is Walmart's base, King said.

In terms of population growth, California and Washington have been the most important "shoulder market," with the highest migration, Neal said.

At the peak of the housing market, migration into the area was four people for every lot platted, said Joel Elgee, an agent at Coldwell Banker Schneidmiller Realty. The ratio in 2009 was seven to one.

"That indicates a pent-up demand," he said. "We are better off than other parts of the country."