Grace Leong - DAILY HERALD | Posted: Wednesday, July 9, 2008 11:00 pm
Zions Bank, Broadmoor scale back, citing construction costs, tighter credit
After several months of lying fallow, two stalled office projects in Utah County are getting back on track, their developers scaling back to reduce construction costs.
Lackluster preleasing activity in the face of a slowing economy, combined with high construction costs and tighter lending requirements, had put on hold the proposed Zions Bank tower in downtown Provo and Broadmoor Towers in Orem.
Construction of the Zions Bank Financial Center, a planned Class A office tower on the northeast corner of 200 N. University Ave., was scheduled to start in the spring. But the project was delayed and is now expected to be completed by early 2010, said Cameron Gunther, owner and manager of PEG Development LLC. He said building will begin shortly but could not immediately specify a date.
Likewise, slow preleasing activity forced the developers of Broadmoor Towers to scale back their plans to build an eight-story, 136,000 square-foot Class A office condominium project at 1600 N. 1275 West in Orem.
"In the last three months, the owners decided that construction costs for a three-story parking terrace and special foundation for the eight-story building made the project too expensive. So we redid the plan, and went back to a five-story building. That saved us about $5 million in costs," said Jason Dodge, vice president of CB Richard Ellis in Provo.
Orem city is expected to give its final approval for Broadmoor's rezoning and site plan on July 22.
Construction of the smaller 78,000 square-foot project, now valued at between $15 million and $19 million, is expected to start in the next three to five months, and will be completed by the first quarter of 2010, Dodge said. To date, Security Metrics, an Orem Web-based data security services provider, has agreed to lease 30,000 square feet as the anchor tenant, while Broadmoor developers are in talks with two other tenants to take about 15,000 square feet each, he said.
"Because the developers shrank the size of the building, they now have additional land to build and develop restaurants and retail. About 18,000 square feet of retail is planned, but we won't start marketing until the office tower is built," Dodge said. "We'd like Magleby's Fresh there."
To cut costs, the Zions center is scaled down to a $33 million, eight-story, 126,000 square-foot office tower including 10,000 square feet of retail and restaurant space. Losing one story and 4,000 square feet saved the developers millions of dollars in potential costs, he said.
"My guess is that Zions wanted that building at nine stories so they can be one story taller than the new Wells Fargo building, so it can't be an easy decision to shrink it by a floor," said Jon Anderson, partner and principal broker with Commerce CRG.
So far, Zions, the anchor tenant, is the only tenant secured for the building. The bank is expected to take up 36,000 square feet in total.
"We were working through financing issues with Zions. The tightening of credit has affected us a little," Gunther said. "The costs of steel, fuel, electrical equipment, sheet rock have gone up. But we bought our steel in December for around $1 million. Now that's worth about $1.75 million."
Despite current uncertainty about the economy, Gunther said he believes there is demand for Class A premium office space in downtown Provo from professional services including law firms and financial institutions.
According to a Commerce CRG report released this week, demand for office space softened in Utah County in the first six months of the year, compared with the same period a year ago. More than 500,000 square feet of Class A office space is expected to be added in Utah County by year-end as projects in Thanksgiving Point in Lehi and in the business parks in Pleasant Grove including West Grove Plaza, an 85,000 square foot office and retail project, are completed.
The office vacancy rate for Utah County rose to 10.5 percent for the first half of the year, up from a vacancy rate of 9.6 percent in the same year-ago period, and up from a vacancy rate of about 7 percent at year-end 2007.
"It's not an alarming increase, but it shows some of the effects of the national economy are starting to rub off on us," Anderson said. "The slowdown could be due to companies being more efficient with resources due to higher fuel prices, hiring less people or people not likely to start new companies now."
John Monson, senior associate with CB Richard Ellis in Provo, said there's a sense of caution among companies looking to lease or buy office properties. "They have lots of choices now," he said.
With new office space pushing vacancy rates slightly higher, some landlords seem more willing to offer concessions such as bigger tenant improvement allowances and rent abatements, as the office market becomes more competitive, Anderson said.