Retail leases losing luster

It would seem like one of the best locations to build a shopping center: Elk Grove Boulevard at Interstate 5, in one of Sacramento's fastest-growing suburbs.

But retailers have been slow to flock to Stonelake Landing since it opened last March. Comprising nine sun-baked, Tuscan-style buildings, the Elk Grove center is 45 percent rented and has lost two tenants that had signed leases.

Signing leases "has taken us longer than we anticipated," said Dan Nethercott, owner of Redfern Development, the firm behind the center. But it's "frankly better than I expected, given the doom and gloom that I hear."

The weakness in Sacramento's real estate market is no longer confined to housing. Commercial real estate is starting to soften – more so in retailing, less in the office and industrial markets. Projects are slower to lease up, and rents are coming down. Developers and lenders are becoming substantially more cautious about proceeding with new projects.

Although the problems aren't nearly as bad as they are in the residential market, some experts fret that a big slowdown in commercial real estate could put additional pressure on an economy already wobbling.

"It is a little bit of a concern," said David Lyons, labor market consultant for the state Employment Development Department. "It looked like we were going to have this isolated to housing, (but) the commercial side is starting to feel some of it."

Developers and brokers say the downturn was probably inevitable, especially in retailing, once home building stalled.

"Retail goes where rooftops are," said Sacramento-area real estate consultant Alan Gianini. "Clearly there's no way anybody could say commercial is immune to what's going on in residential."

The housing market is hurting retail in another way: When times were good, entrepreneurs tapped their home equity to open stores and restaurants. No more.

"For a lot of startups, their initial line of funding comes from home-equity loans," said Garrick Brown, regional research director at Colliers International real estate. "That's disappeared."

So far, the commercial market isn't in a full-fledged swoon.

Developer Sammy Cemo, head of Cemo Commercial Inc. in El Dorado Hills, said rental prices for retail sites have dropped 15 percent in the past year – but the market has hardly dried up.

"The last six weeks have been real active," said Cemo, who develops office and retail sites. He said the recent drop in interest rates has helped.

Craig Burress, an executive vice president with CB Richard Ellis in Sacramento, said vacancy rates for retail centers have risen about two percentage points, to 7 percent, since 2005. "It's significant, but it's not colossal," he said.

Marty Clevenger, president of The Westerra Group, a commercial developer in Roseville, said small strip centers without a large anchor tenant have fallen out of favor. And new shopping centers anchored by supermarkets have come to a halt because of the dropoff in home building.

Grocers "have pulled back because those projects are specifically tied to housing units," he said.

Clevenger said his own company is backing off from development projects until the picture brightens.

"We're moving to a cash position and waiting to see how this shakes out," he said. "We've liquidated everything."

Making matters worse, the credit crunch has spread from housing to other forms of real estate, he said.

"Capital is more scarce and more expensive," he said. "The higher borrowing costs and more strenuous underwriting standards will make it harder for developers in the coming year to deliver projects."

The credit crunch is affecting the office market, too, said Tony Wood, a broker at TRI Commercial in Roseville. Lenders are demanding more cash upfront from developers, causing some deals to stall out.

"There's no wiggle room on loan terms anymore unless you've got great credit with the lender and your own funds are up for grabs," he said. "Projects have gone down because terms changed at the last minute."

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