Commercial real estate in SLO County: Great time for tenants

San Luis Obispo County’s commercial real estate market is beginning to show some signs of stability as the economy tries to lumber out of a severe recession.

Lured by incentives such as reduced rent, business owners — seeking to expand or take advantage of good deals — are starting to lease space, and a few commercial projects are moving forward.

That means the market may be turning a corner; although those who watch commercial real estate closely say a full-scale recovery could be years away.

“The leasing activity seems to be fairly strong,” said Mark Anderson, owner-broker of Anderson Commercial Real Estate in San Luis Obispo. “There are quite a bit of local tenants moving within the community. We’re not getting a lot of new businesses to come to San Luis Obispo, but businesses that are here are continuing to grow and we’re seeing that activity.”

The activity is being driven not only by the desire for more space, but also by property owners who are being more realistic in what they charge for rent, said Preston Thomas, leasing agent with Rossetti Co. in San Luis Obispo.

“Some are cutting their rents almost in half,’’ Thomas said. “They are doing whatever it takes to get a tenant. Some retail spaces that were going for $3 a square foot are now $1.60 a square foot. That’s the same for office space.”

Clint Pearce of Madonna Enterprises said his Moresco Plaza office complex in Atascadero is 100 percent leased after he offered six months free rent to tenants and built space out for them.

At Irish Hills Plaza, a Madonna Enterprises development on Los Osos Valley Road, TJ Maxx is on track to open April 15, New Frontiers in late September and Target is set to break ground across Los Osos Valley Road in San Luis Obispo in the next month or so.

Pearce called it a “tenants’ market,” noting that in a weaker economy, tenants can be aggressive on price and have their pick of choice locations.

“It’s starting to improve, and there’s more optimism, too,” he said. “Things have a ways to go before they are healthy, but I think there’s at least a pretty strong sense that the bottom is behind us.”

Financing still tight

While the mood is more upbeat than it was last year, agents and property owners say that vacancies are higher and sales are few. A lack of available financing — because of tighter underwriting standards and restricted credit — has made deals nearly impossible, they say.

New construction has come to a halt in the North County, which is not adding inventory to the mix, and, as a result, there are still more spaces to fill than tenants, said Corban Holland, agent at Pacifica Commercial Realty in Paso Robles.

Paso Robles has about 10 percent to 15 percent office space vacancy, while industrial stands at around 7 percent to 10 percent, and retail at roughly 5 percent to 10 percent, Holland said.

Commercial real estate experts in the city of San Luis Obispo say office vacancy ranges from 10 percent to 15 percent, with industrial somewhat higher. The vacancy rate for shopping centers and retail in the downtown area of San Luis Obispo is below 10 percent.

“We’re starting to see some stabilization, but we won’t really see a real turnaround until five years out,’’ Holland said. “It will be slow and drawn out.”

Prices per square foot have declined an average of 20 percent to 40 percent in the past two years, in the North County, and that bodes well for future investment, Holland said. But right now, banks’ unwillingness to lend is making it “very difficult for people to get a loan to purchase.”

Potential buyers can often get Small Business Administration Loans to help make a purchase, but even that is not guaranteed. Thomas of Rossetti Co. agreed.

“Without a doubt, unless there’s seller financing involved or it’s all cash, there aren’t any sales,’’ he said. This is despite commercial real estate values in the city of San Luis Obispo falling about 25 percent in the past year.

Another reason for concern is the potential for commercial real estate loan failures as loans come due, and the subsequent fallout for the nation’s banks, in particular the mid-size and small banks.

The congressional oversight panel for the Troubled Asset Relief Program recently reported that about $1.4 trillion in commercial real estate loans will reach the end of their terms between 2010 and 2014. Nearly half are currently “underwater,” which means that the borrower owes more than the property is worth, the report on the federal bailout noted. Commercial property values nationwide have fallen more than 40 percent since the beginning of 2007, and increased vacancy rates and falling rents have contributed to the declining value of commercial property.

Mark Burnes, broker and owner of Burnes Commercial Group in Pismo Beach, said there’s a big push by organizations such as the National Association of Realtors to use federal bailout funds to help the commercial market.

“Even through the wave of foreclosures, some people were able to stay in their houses,’’ he said. “They did what they could to prevent as many loans as they could from crashing. If they could do the same thing with commercial real estate, the more they would prevent from going into foreclosure and the softer the landing.”

While Holland of Pacifica Commercial Realty said a number of developers are scrambling, he doesn’t expect to see a big spike in foreclosures as in the residential market.

“We have a lot of owners who have owned these buildings around here for a long time, and they don’t owe a lot on the building,’’ he said. “Even if they have a decrease in rent, they can weather this.”

Pearce of Madonna Enterprises was even more optimistic.

“If you have a good quality property that is leased or that has good cash flow coming out of it, many banks are happy to refinance,’’ he said. “New appraisals have to be taken out, and things have to pencil out for lenders, but a lender is more likely to refinance a property if it is still performing.”

Signs of hope

Despite lingering uncertainties, the commercial real estate sector, at least nationwide, could regain its footing as early as next year, economists say.

Mark Schniepp, economist with the California Economic Forecast in Goleta, said he doesn’t see a “major disaster” occurring, and that commercial real estate will recover when unemployment recovers. The first category to return will be office, then industrial and retail, he said.

“A third-quarter rebound will happen, and even then it will not be real noticeable,’’ he said, adding that commercial real estate’s recovery won’t become clear until 2011. Lawrence Yun, chief economist for the National Association of Realtors, is hopeful for some improvement next year. Commercial real estate is what economists call a lagging indicator of the broader economy, which means that it will likely not see a turnaround until several quarters after the economy rebounds.

“With the job market expected to turn for the better later this year, we’ll see rising demand for office and warehouse space, but that isn’t likely before 2011,” Yun said. “At the same time, improved consumer confidence would help sustain the retail sector and encourage more people to enter the rental market.”

That’s already happening here, say those tuned into the local marketplace.

Burnes of Pismo Beach said he leased about a half-dozen spaces to small or expanding small businesses in November and December, typically a slow time for leasing.

Ron Whisenand, community development director for the city of Paso Robles, said downtown office and retail spaces are slowly being leased, including the former Idler’s building at 13th and Park streets.

Spaces are also starting to fill in Golden Hills Plaza, the site of the Lowe’s and Bed, Bath & Beyond when it opens this spring.

Claire Clark, economic development manager for San Luis Obispo, said it’s been a difficult year for business and that some of the larger vacant shops in the downtown are having trouble being filled. However, she said San Luis Obispo isn’t experiencing the pain like other communities that were harder hit by the recession and declining real estate values.

“From a broad perspective, we are still doing well,’’ she said.

Holland of Paso Robles’ Pacifica Commercial said that as prices fall to more realistic levels, “investors will once again see the value of the Central Coast, the potential that is here and the way of life,’’ he said. “We live in a great area, and people want to be a part of it.”