Commercial real estate values plunge for first time in 20 years, new reappraisal says

For the first time in two decades, commercial real estate values have plunged in Colorado Springs — and they’ll probably continue to drop, said El Paso County Assessor Mark Lowderman.

“I don’t think we’re going to see any kind of a recovery in the next couple of years,” Lowderman said of the commercial market.

Like falling residential property values, lower commercial values mean reduced tax revenue for local governments. Lower commercial values also mean reduced income for property owners and a lower-than-expected return on investments when they sell their properties.

At the time of the assessor’s last real estate reappraisal in 2009, Lowderman’s office estimated the market value of El Paso County commercial real estate at $7.3 billion. Now, the assessor's new reappraisal pegs the countywide value of commercial property at $6.8 billion — a nearly half-billion dollar or 6.8 percent decline.

The assessor’s values are for tax assessment purposes, and buyers and sellers who negotiate an arm’s length deal don’t necessarily use the assessor’s figures.

Still, it’s the first decrease in the commercial real estate tax base since the savings and loan crisis of the late 1980s and early 1990s, Lowderman said. At that time, a federal agency was created to sell assets of failed savings and loans. That liquidation put deeply discounted commercial buildings and land on the market.

Today, the causes of lower values are different, but the results are the same.

Blame the economy, of course. Many employers and retailers have closed up shop or downsized, leading to higher vacancies in offices, industrial buildings and shopping centers. Landlords and building owners responded by lowering rents to attract tenants, which caused values to decline.

“It’s the unfortunate reality,” said Steve Engel, president of Griffis/Blessing Inc., one of the Springs’ largest real estate companies.

Values also have declined for vacant commercial land; with relatively little construction taking place, commercial land prices have fallen significantly, said Gary Hollenbeck, a principal with brokerage Palmer McAllister in Colorado Springs.

"The demand isn’t there,” he said.

Lowderman’s commercial reappraisal typically relies on property sales to determine market values. But with a puny 200 sales in the last two years, compared with a typical 700 to 900 sales in the years in between reappraisals, Lowderman sought additional information to help gauge values.

He sent 3,500 surveys to commercial owners and property management firms to determine income levels on the properties. About half responded — far more than the 10 percent response rate Lowderman expected.

Lowderman said the responses pointed to the same market conditions alluded to by Engel; during the reappraisal period, vacancies dropped, incomes fell and property owners made concessions to attract tenants.

The sagging economy also has meant fewer new offices, shopping centers and other buildings have been constructed, Engel said. In a good economy, new projects typically raise values for similar properties.

Another cause of reduced values: When rents fall and incomes suffer, property owners can’t necessarily refinance loans they’ve taken out to make their purchases. Lenders then foreclose and sometimes put the properties back on the market at a discount.

Commercial foreclosures in 2010 trailed off by year’s end, according to El Paso County Public Trustee’s Office records. While all properties are different, one reason foreclosures waned might be that lenders didn’t want to add distressed properties to their portfolios and sought to work out deals with owners, Hollenbeck said.

But that delay can only go on for so long, Lowderman said.

Colorado Springs’ commercial market has been cyclical over time. But the current downturn has gone on much longer than in the past and shows no signs of improvement that would lead to increased values, he said.

As a result, Lowderman predicts lenders will ramp up foreclosures, take back properties and sell them at big discounts.

“I see a significant increase in the number of bank-owned commercial properties that will probably flood the market,” he said. “When that occurs, history tells us that it drives commercial property values down.

“I’m usually kind of an optimistic person,” Lowderman added, “but I don’t see much optimism on the foreseeable horizon.”

Engel and Hollenbeck, however, aren’t convinced the commercial market will continue its downward spiral as Lowderman forecasts.

Even if lenders take back properties, they won’t automatically sell them at steep discounts, as the federal agency did 20 years during the S&L crisis. Lenders who find themselves with top-of-the-line office properties, for example, might try to rent them first, wait for the economy and sale prices to improve and then sell without necessarily taking a major loss that would lead to a further decline in values. 

“It’s to be determined,” Engel said.

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Contact the writer at 636-0228