Credit squeeze hits commercial construction in Tri-Cities

TRI-CITIES -- Even as the Tri-City economy continues its steady march forward, the credit squeeze and difficult national economic conditions seem to have slowed local commercial construction.

“There’s a little bit of belt tightening going on, like everywhere else,” said Dirk Stricker, broker and owner of Dirk Stricker Commercial Real Estate in Kennewick.

But the commercial real estate market still is active, he said, and space built in the past few years is starting to fill.

Commercial construction permits issued by the three cities for the first six months of the year show slightly less activity than in 2007 in Pasco and Kennewick but increased activity in Richland.

Much of the increase in the value of Richland’s permits comes from a couple of big projects.

The 94 permits issued are valued at more than $34 million, according to the city. That includes the $10 million city library remodel as well as a $6 million office building on Garlick Boulevard.

Through June 2007, Richland issued 43 commercial construction permits valued at $19.2 million.

“A lot of the (projects) we’re seeing are tenant improvements and remodels,” said Rick Simon, Richland’s development services manager.

Such projects aren’t quite as affected by tighter financing options, said Gary Ballew, the city’s economic development manager.

“Unless it really makes sense, you’re not going to see someone doing a new building,” he said. “I wouldn’t expect a lot more retail space to be coming online unless there are tenants already arranged.”

Gayle Stack, broker and owner of EverStar Realty in Kennewick, agreed space built without planned tenants is becoming more scarce.

“I’ve seen the spec leasing space kind of dwindle,” she said. “Unless there’s a very good credit risk, lenders are very much requiring a certain percentage of occupancy prior to lending for new construction.”

Some projects are on hold because of trouble with financing, said Dan Briscoe, vice president of business development for Apollo in Kennewick.

“Commercial construction has slowed down somewhat, from a standpoint of some projects are on hold due to funding issues,” he said, citing condos and office building projects. “I think it’s a national issue. I think it’s a credit issue more than anything.”

Stricker said the market still is good, but it’s been a little overdeveloped and “people are realizing that.”

In Pasco, City Manager Gary Crutchfield isn’t surprised by the city’s slight drop in commercial construction. “Plus, we had a pretty good run of commercial development on Road 68,” he said.

Through June, the city had issued 120 commercial permits this year valued at nearly $18 million.

That’s only four fewer permits than in the same period of 2007. Total value for the first half of last year was more than $67 million because of the nearly $49 million permit issued for Chiawana High School.

Subtract the school from the equation, however, and the total falls to almost $19 million, only 4 percent more than the value of permits issued through June of this year.

Mitch Nickolds, the city’s inspection services manager, tracks taxable and exempt commercial projects so the city has a feel for what to expect in terms of future property taxes. Government-owned properties generally are exempt from property tax.

Through June, commercial permits issued for taxable projects amounted to about $8.8 million, while exempt projects came to about $7.9 million.

That compares with $10.5 million in permits for taxable projects through June 2007 and $56.4 million in exempt projects, which includes the high school permit.

Nickolds said commercial construction is “a barometer of the desire people have to take a chance on our city.” And from his standpoint, “the activity levels that we’re seeing are comfortably sustainable and are not going to result in any major downturns in the near future.”

In addition to the credit squeeze, another factor affecting permit values nationwide is the growing cost of materials, said Ken Simonson, chief economist for Virginia-based Associated General Contractors of America.

An index that measures the cost of all materials put into construction projects is up 12 percent from July 2007 to July 2008, he said.

Though national spending on commercial construction through June was up 12 percent over the same time last year, Simonson expects slowing as the year continues.

“The kinds of projects that depend on bank financing and immediate rental income such as retail, office and hotels ... those are going to turn negative, either by the end of the year or before,” Simonson said.

Kennewick’s commercial construction numbers showed the biggest drop.

The city issued 91 permits valued at $4.3 million through June, compared with 112 permits worth $36.6 million in the same time last year, according to city records.

That’s a nearly 19 percent drop in the number of permits and a 37 percent decrease in value.

“There were a couple of months that were slow,” said Wes Romine, Kennewick’s development services manager. But he anticipates a pickup toward the end of the year with continued development in the Southridge area.

City Manager Bob Hammond said residential construction is a better measure of economic health. “It provides some perspective, rather than a true economic indicator,” he said.