The last few articles have been about the residential portion of our market. We thought that it would be appropriate to take a look at what is happening in the commercial arena as well. Since our office is involved in both residential and commercial appraisal’s we keep track of statistics in each of these areas. Shaun has done a great job of updating the residential statistics in the web site every week with over a year’s worth of data available at the site. Commercial statistics are much harder to follow, mostly due to the fact that many of the commercial sales do not get reported through the MLS system. While the majority of residential sales are reported through the system, it is much more common for commercial sales transactions to take place without getting reported. Since Montana is a non-disclosure state (meaning sales data is not public information) it is much more difficult to track sales that are not reported. That being said, we do track all of the information that we can run down, either through the MLS system, local brokers, other appraisers and/or buyers and sellers of this type of property.

The data that is available shows that the commercial market has slowed fairly significantly in the Helena area over the past year. In the years 2004 to 2008 we saw between 30 and 40 sales of commercial property a year. This year there have only been 12, as of the first of October. Even if we see several more through the end of the year, this still computes to around a 50% decline in numbers of sales. The average days on market has increased from 212 in 2008 to 382 this year to date, while the percent of list to sales price ratio has decreased from just under 92% to 84.5%. (List to sales price ratio of 84.5% means that if the list price is $100 the sales price ended up at $84.50.) In the Helena area MLS there are 145 commercial listings, with an average listing period of 242 days at present. As you can see, this number of listings represents a significant oversupply, given that there are only 12 closed sales so far this year. It is taking longer to sell a property and sellers are receiving 15% less than they are asking on average.

One of the factors that makes the data above really confusing is the amount of new commercial construction that continues in and around the city. The new development next to Shopko with a restaurant, motel, fast food business and an office is a good example. A second motel along with another restaurant and several other businesses are in the pre-construction phase just down the road from this development. A new office building was just completed in Nob Hill and the State Fund building is coming along downtown. What is going on? If existing buildings are available, why are new ones still going up?

I believe that there are several reasons. The first being that commercial construction projects are typically planned quite a ways in advance and several of these projects have been in the planning and permitting process for over a year. The other main factor is, as always in real estate, location. These businesses want to be in a particular location, and are willing to take the risk of building new buildings in what would be considered a questionable economy to be where they feel is the best and ultimately the most profitable place for their business. The Home Depot/Costco area appears to be where the majority of these businesses want to be, hence a lot of new buildings going up. In addition to location and planning, some projects are just easier to start from scratch and build exactly for what your needs are, rather than trying to retrofit an existing structure (think State Fund building).

So over all, the commercial real estate portion of the market appears to be a mixed bag at present. While sales of existing properties are very slow, the new construction portion is taking up some of the slack. This is important, as commercial construction is proven to be a large benefit to the local economy. It is reported that every dollar spent in this type of project turns over in the local economy between three and five times. As an example, the general contractor buys building supplies from a local supplier. This business pays its employees with the proceeds from that sale and the employee then uses that income to purchase groceries, tools or other items, with the owners of the grocery store or other merchants then paying their employees who again spend those dollars. Commercial growth is vital to a stable and/or growing community. For this reason it is important for all of us involved in the real estate community, in fact the community as a whole, to support well planned commercial projects. It seems that lately there has been what I consider a very vocal minority involved in making it very difficult to proceed with this type of project. In the past year we have lost a 25+ million dollar building that was planned by Blue Cross Blue Shield, a 25+ million dollar building that was planned for state offices and we are in danger of losing a 25+ million dollar project at the Caird site. All of these projects have seen opposition from their neighborhoods citing the most common of all scare tactics – it will increase traffic and reduce property values! I won’t go into those issues in this letter, but I will point out that for every 25 million dollar project we don’t build, that is a 75 to 100 million dollar benefit lost to the local economy. How many of these can we afford to not build. In an already sluggish economy, we should be asking the question “How can we make this project feasible?”, not “How can we keep this from being built?” I propose that we come together as a community and look at these proposed projects with an eye towards positive growth, not the NIMBY attitude of “not in my back yard”. Every city in the country has experienced growth and not all of it has been positive, nor even wanted in many cases, but for our city to continue with a vibrant and growing economy, it is vital that we not approach these projects with closed minds and fear of change. We should accept the reality that change happens and make the decision to be involved in the process so that we can make a difference in how that change takes place. We can help guide these projects to fruition and as a community, reap the benefits. As real estate professionals, we owe at least that to the city that provides us with our livelihoods.

As always, if you have questions or comments regarding the issues above, feel free to contact us at our office, or on our website.