Low vacancy rates usually mean a green light for developers to begin building anew, but as the recent collapse of a major deal in Burbank illustrates, that's starting to change.

The real estate market has nowhere to go but down, some experts are concluding, and developers and capital partners don't want to be caught holding the bag when it does.

Burbank's office vacancy rate is only 5 percent, normally a level at which developers are anxious to start building. But lenders are growing increasingly cautious, fearing a downturn is on the way. Those newly emerging dynamics are what led Regent Properties to quash plans to develop a $100 million mixed-use project in the city's downtown core.

Real estate experts say lenders and other capital sources no longer consider vacancy rates alone when assessing development plans.

"In every past cycle, when vacancies got below a certain level, that was the stimulus to do more development," said Jim Shaw, managing director for Cohen Financial, a real estate investment bank. "But success always led to competition, which always led to a collapse in the market, so the capital markets are trying to be a little more disciplined."

On April 24, Regent notified Burbank city officials that it had decided to terminate its development agreement, after months of attempts to redesign the project to meet the changes in Burbank's landscape since Regent inked the development deal about two years ago.

"We will begin immediately looking for a new developer for the project," said Ruth Davidson-Guerra, project manager for the site, bounded by Olive Avenue, San Fernando Boulevard, Angeleno Avenue and Third Street. "I believe we'll try to aim for some sort of mixed-use project."

Unraveling of a deal

About two years ago, Regent acquired the three-acre site with plans to construct a complex with 200,000 square feet of office space, a retail component and a hotel. The company had been close to a deal with Marriott International to build a 300-room hotel, and Burbank officials said Marriott is still interested in the site. But the outlook for the other components of the project had been unraveling for some time.

Although the office vacancy levels in Burbank are very low, the demand for that type of space is expected to taper off, and several other projects announced or begun since Regent acquired the site have further dampened the outlook in that sector.

"I think there's a question mark in terms of what the market will absorb and what lending institutions will lend out," said Bud Ovrom, Burbank city manager.

Officials at Regent did not return phone calls, but in a press release, the company's Managing Partner Jeff Dinkin said the developer was unable to obtain financing for the hotel transaction. "We are extremely disappointed that we will be unable to move forward with the project," Dinkin's statement read.

Burbank city officials said the company had been struggling with a way to redesign the project to reflect today's financing and development realities. Under the initial agreement with the redevelopment agency, Regent was to have begun construction on April 1. The company had requested and received several extensions to its contract, the latest of which was due to expire May 10.

Real estate experts say downtown Burbank is especially vulnerable to the new degree of scrutiny from lenders because the potential for development there is considered limited to begin with.

"Downtown Burbank is not the Westside," said Larry Kosmont, president of real estate consultancy Kosmont Partners. "Downtown has never been a prime target for office space."

The size of the project is also a prime consideration for developers and lenders, particularly where speculative projects are concerned. Financial sources have been reluctant to back developments larger than 100,000 square feet unless the developer is able to roll them out in separate stages.

Unlike retail or industrial development, it takes several years before an office building hits the market, and most agree that the demand may not remain at current levels by then.

"Part of it is concern of where we are in the cycle," said Shelly Magoffin, president of commercial mortgage bank Dwyer-Curlett & Co. "(Equity partners) feel we're at the (height of the cycle) and the markets from here will get softer, not stronger, so equity has been getting more difficult to obtain in the past year than it was over the last two years."

Other developments planned and underway are also affecting the outlook. M. David Paul & Associates recently acquired a parcel in the Burbank Media District with plans to develop 575,000 square feet in two phases. And although one of the company's other developments, Media Studios North near the Burbank Airport, is fully leased, about 37 percent of that building has recently landed on the sublease market, promising to offer increased competition to any new developments.

Burbank's retail climate has also changed since Regent first began drawing up its plans. Movie theaters have overbuilt and there are pockets of high retail store vacancies.

"The retail market now is very soft in Burbank," Ovrom said.

The Media City Center, an enclosed mall, has been laboring under an estimated 20 percent vacancy rate, Ovrom said. And Blockbuster Music, Crown Books and Newberry's have all vacated their properties in Burbank Village, leaving about 20,000 square feet of retail space for lease there.

In addition, Zelman Cos. has received approval for a 600,000-square-foot retail power center to house stores such as Staples and Costco when it opens early in 2001.

Burbank officials concede that the economics of developing the downtown parcel have changed since the redevelopment agency first began seeking proposals.

"We will be defining the project parameters based on the economic viability," said Davidson-Guerra. "We started down the road with Regent over two years ago and the economic climate is different now."

The city has contacted the developers that were on the short list when requests for proposals were originally issued, including local Burbank developer Cusumano Real Estate Group, Legacy Partners of Irvine, and Civic Partners in Costa Mesa, which had been part of a consortium that responded to the earlier requests. Other developers will also be invited to submit proposals, Davidson-Guerra said.

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