Office builders taking a break
By Mike Boyer and Lisa Bernard-Kuhn •
mboyer@enquirer.com,
lbernard@enquirer.com • December 28, 2008
The construction boom that delivered multimillion-dollar deals and behemoth developments to Greater Cincinnati and Northern Kentucky in 2008 could end with a bust in 2009, local industry experts say.
As the cold winds of the recession extend beyond the banking, auto and housing industries, local commercial developers and brokers say the outlook for the new year is grim.
"In my 22 years in the business, I don't think we've ever gone into a new year with more opaqueness about what's ahead," said Dave Noonan, a senior vice president at Colliers Turley Martin Tucker who specializes in industrial projects.
Projects with committed tenants or financing are moving forward, but speculative office, retail and industrial developments are on hold.
"Unless there is significant pre-leasing that has taken place, I don't see any new construction going forward in 2009," said Scott Yards, vice president of the CB Richard Ellis office properties group.
Already, at least $750 million in planned projects have been sidelined indefinitely:
Otterbein Retirement Living Communities is holding off on a $100 million retail-residential center along Ohio 741 near Lebanon. "We believe the market has changed significantly," said Jill Hreben, senior vice president at the nonprofit.
Columbus-based Steiner & Associates put its plans on the shelf for the $500 million Liberty Town Square retail/residential development planned for 110 acres at Hamilton-Mason Road and Interstate 75 in Liberty Township.
Duke Realty Corp. said it's delaying its plans for twin, 150,000 square-foot office buildings for a site south of the Streets of West Chester, east of I-75. "Everybody's cautious," said Jon Burger, senior vice president at Duke Realty. "Given the current state of the market, we're going to keep that site for future development."
Al Neyer, Inc. called off its $10 million retail and residential development known as Linden Park in College Hill. The firm cited poor presales, which led to an inability to land financing.
Xavier University said it's holding off on a $150 million student housing and retail development off of Dana Avenue in Norwood. The university said this month that it is delaying the project until the economy improves.
"Turbulent times'
As banks have stepped up their lending requirements, developers have been forced to bring more leases and money to the table.
A year ago, projects were finding financing with as little as 20 percent down and 50 percent pre-leasing, said Alan Piker, managing principal at CresaPartners, a Walnut Hills real estate firm specializing in tenant representation.
Now banks are requiring as much as 60 to 70 percent in pre-lease commitments on projects and 30 to 40 percent down payments, he said.
"Clearly, a lot of speculative projects in the office and industrial markets have slowed to a crawl," Piker said.
As turmoil began to unfold in the financial markets at the end of the third quarter, signs of a slowdown in the region's commercial construction sector quickly emerged, said Joe Hummel, executive director of Allied Construction Industries, a Lockland-based trade group that represents 700 regional commercial construction firms and subcontractors.
"Three of the top five architectural firms in Greater Cincinnati have gone through layoffs, some of the top developers have laid off staff and activity levels at the geotechnical firms are way down," Hummel said. "Those three components are always at the front end of a project - and if that activity is down, it means there is very little backlog."
Miller Valentine Group, which has offices in Deerfield Township, recently cut its 850-member workforce by 3 percent, said Mike Greene, senior partner and chief executive of MV Communities.
"These are turbulent times and reducing overhead means displacing good people," Green said. "There is no way to put a positive spin on losing valuable members of your team, but it's a necessary response to troubled markets and the uncertain forecast."
Officials at downtown-based Al. Neyer Inc. declined to comment on the number of employees the firm laid off, but said the company is heading into 2009 with roughly 40 percent less work in its pipeline than it had at the end of 2007.
"We had to adjust our workforce to reflect that," said Lauren Brunner, executive vice president of business development.
At best, Hummel said, the region is forecast to see declines in new development that range from 12 percent to 25 percent next year.
"We're looking at 2009 as a hole," he said. "How deep and how wide? We don't fully know."
Leftovers from 2008
With few new projects expected to rise next year, everyone will be watching as several projects under way now wrap up in 2009.
Duke Realty is developing two 210,000-square-foot office buildings for GE Aviation just north of Union Centre Boulevard in West Chester. The consolidated engineering complex is expected to house about 1,400 GE engineers and staff when completed next year.
Further north on I-75 at Ohio 63 in Monroe, Chelsea Property Group is moving toward an August opening of the $100 million Cincinnati Premium Outlet retail center which will have up to 120 stores.
And west of Monroe, off Ohio 63 and Salzman Road, Industrial Developments International Inc. is constructing a 720,000-square-foot speculative industrial warehouse building. The project, which has the benefit of a 15-year, 100-percent real property tax abatement offered by the city of Monroe, is an exception to the overall slowdown in large commercial projects.
Further south, Bear Creek Capital has said it expects to wrap up construction of roughly 270,000 square feet of office space at its mixed-used development in Kenwood Towne Place in Sycamore Township.
The Montgomery-based firm has also said it plans to finish development of a new Kroger Marketplace at its Newport Pavilion by early summer. Construction has started on the retail center, which is located off Interstate 471.
Officials with Bear Creek did not return calls seeking comment about the status of the projects.
Meanwhile, other developers say they are hopeful that they can meet the pre-leasing requirements to land financing for continued build-out of multi-phased projects launched this year.
Dan Neyer, of Neyer Properties, has said his firm is trying to line up medical office users and other tenants for a second office tower at the recently developed Keystone Parke in Evanston.
Brunner said Al. Neyer Inc. has yet to halt hopes for more work at 2009 at Linden Pointe on the Lateral, a 22-acre mixed-use business park in Norwood.
"We'd love to have at least one build-to-suit project on that land next year," she said.
Joe Kramer, executive vice president for commercial development at Lebanon real estate firm Henkle Schueler Inc., said there are fewer large-scale retail and industrial projects, but his firm is seeing a steady steam of smaller commercial projects.
Kramer added the slowdown in activity has had a small silver lining: It's helping to bring down construction costs. "Asphalt, concrete, steel and sheetrock are all coming down in price," he said.
Strategies for survival
To free up capital, Brunner said Al. Neyer is selling "strategic land parcels" and aggressively leasing vacancies in its portfolio of properties.
"These times call for more aggressive lease terms, shorter lease terms and higher tenant improvements, and that's true for every single developer that has vacant space," Brunner said.
Retail real estate developer Midland Atlantic Properties is trying to hedge empty storefronts by reworking leases for tenants hit by the recession.
"In all of our projects across the country, we have tenants who are struggling," said John Silverman, the firm's managing principal. "We have an advantage, though, because we don't have any projects that are overleveraged, which gives us some flexibility with our tenants who are facing hard times."
The Sycamore Township-based firm's local projects include the Voice of America Centre in West Chester Township and Kenwood Place, across from Kenwood Towne Centre.
While the firm has averaged roughly $125 million in new development in recent years, Silverman said he expects to end 2009 with just $50 million in new work.
When development activity slows down for Schumacher Dugan Construction Inc., the firm focuses on other things such as maintenance and repair work for long-time clients, training employees on "green" building technology and looking for opportunities to acquire land for future development, said Chris Wunnenberg, director of development at the West Chester-based firm.
While the slowdown is significant, Wunnenberg said he doesn't think it's unprecedented.
"We've been doing this for 33 years. People forget back in the early 1980s, inflation was at 12 percent, the prime rate was over 20 percent and unemployment was in double-digits," he said. "We're nowhere close to that yet."
Others are not as optimistic. Silverman said the pain inflicted on the industry now will likely get worse, and could extend into 2010.
"In the 26 years I've been in the business, I've seen retailers come and go, I've seen high interest rates, but I have never seen a situation where such a broad percentage of the population is having so much trouble," he said. "It's not just one retailer. It's every retailer. It's not just one bank, it's every bank."
Development firms operating on "shoestring budget" may not make it through 2009, Silverman said.
"The companies that are well capitalized, with a good portfolio, will make it; but they may not have much in their pipeline for 2010," he said. "Everyone has put the brakes on, and it's going to take some time for it to gear up and move forward."
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