Commercial property values hold steady

While major cities such as San Diego and Dallas produce the highest rents on such properties, those markets also are volatile, and they experience a purge every four to seven years that derails their economies, said Kirk Heyle, CCIM, of Springfield-based Heyle Realtors and Counseling Services.

“There are foreclosures and rent drops and lessee defaults, and that always affects those properties,” Heyle said. “After the purge, then it starts again and you see cranes on every corner in Dallas.”

In southwest Missouri, “there are fewer zeroes here, but we have pretty stable values,” he added.

Conversely, the Moody’s/Real Property Price Index released Nov. 19 showed a 1.2 percent decline nationally in property prices between August and September.

Stability in the local market is very attractive to investors, particularly those singed by the stock market.

The National Association of Realtors’ third-quarter Commercial Real Estate Index slipped 0.1 percent to 120.6, but nationwide commercial brokerage activity remains 0.7 percent higher than it was in the third quarter of 2006, when it was 119.7.

“The major reason that commercial real estate is continuing to go up in value is because investors are willing to accept a lesser and lesser rate of return,” said appraiser Joe Roberts of Roberts and Associates. “Probably because there’s just a lot of interest – people think there’s money to be made in income property.”

For local investment properties, Roberts said the rate of return is close to 8 percent, compared to 10 percent in 2001. While it’s down a bit, that’s still better than the 6.6 percent national rate of return on large, high-quality investment properties, down from 8.8 percent in 2001. Roberts noted, too, that even though the rate of return is down, recent local deals indicate a 25 percent increase in property values because buyers also are willing to accept a lower rate of return.

Springfield prices

The price of commercial properties varies according to a number of factors, including location, quality of construction, tenants, demographics, age of the structure and traffic counts, according to Mark Patrick, agent/broker with Coldwell Banker Commercial Vanguard Realtors.

Average prices per square foot on new construction are naturally higher than for older structures, according to appraiser Roberts, whose company provided some “ballpark” figures for commercial property prices. For retail properties, for example, Roberts said the new space goes for roughly $120 per square foot, compared to $75 a square foot for property that’s 30 years old. But for the investor, price alone is not the issue. Tenants are key.

“There is a ton of triple net investment-grade properties for sale across the country,” Patrick said. “It’s all driven off the creditability of the tenant.”

Triple net is a lease in which the lessee pays rent, taxes, insurance and maintenance fees to the property owner.

“The national tenant is rated the highest, then the regional or local,” Heyle added, but the big tenant is not necessarily the most profitable one; rather it represents the lowest risk from a credit standpoint.

“A national tenant that’s got lots of outlets and a major financial statement, the buyer will accept a lower rate of return because of the high-quality tenant,” Heyle said.

Broker Galen Pellham of Pellham Commercial Realtors points out, however, that a national tenant with name recognition doesn’t necessarily trump a solid local tenant – MCI being a prime example of a national tenant gone wrong at 1720 E. Primrose St.

Pellham, as a member of the investor group that owns the Incredible Pizza building, 2850 S. Campbell Ave,, said he places greater value on that building’s local tenant than he would a national tenant because of Incredible Pizza’s track record.

The 30-year-old, 51,106-square-foot Incredible Pizza property is offered for sale at $8.8 million, or $172.19 per square foot, which many would consider high for the market. Pellham, however, cites a 15-year, $55,000 monthly lease personally guaranteed by Incredible Pizza President Rick Barsness as the key to that value.

Does he expect it to sell at that price? Not necessarily, but “we’re not eager to sell it,” he said. “If someone comes along and pays our price, we’ll sell it. But we’re perfectly happy to get a payment each month.”

Big Deals

Recent commercial deals demonstrate the wide range of values in Springfield area real estate.

In October, California investor Jeff Bether paid $6.8 million – or $183.78 per square foot – for the 13-year-old, 37,000-square-foot Battlefield Square Shoppes retail center, home of Pier I Imports and Entertainmart.

Meanwhile, in November, St. Louis developer Kevin McGowan paid $3 million – or $19.23 per square foot – for the vacant 90-year-old, 156,000-square-foot Heer’s building on downtown’s Park Central Square.

Local Realtors report values can vary widely depending on the location, construction quality, age, access and tenants, but the bottom line for investors is the bottom line: the net operating income.

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