Andrew Patterson - Associate Finance Officer, Seattle
Fed to Purchase Mortgages with $800 billion – The Federal Reserve Bank will purchase as much as $600 billion in Fannie Mae & Freddie Mac debt and will set up a program to lend $200 billion for consumer and small business loans. “This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed said.
AIG Re-Capitalization & Citigroup Rescue – The original $85 billion bailout plan for AIG has undergone a massive overhaul as the US government buys $40 billion in preferred AIG shares using TARP. The goal is to effectively cancel credit default swap agreements, secured by real estate assets, sold by AIG to thousands of banks and institutions, in an effort to stave off losses on the banks swap investments and mortgage backed securities. In a similar situation, Citigroup will receive $20 billion in fresh capital and a government guarantee for losses on about $300 billion in “toxic assets”.
November Rate Volatility – The volatility in the market impacted the benchmarks for commercial real estate lending severely in the month of November. The 10 year US Treasury dropped almost 100 basis points during the month, to the lowest level in recent decades. 30-day LIBOR continued its two month decline of over 300 basis points as regulators cut inter-bank lending rates worldwide. Overall the impact on “all in” commercial mortgage rates has been almost negligible. As these benchmark rates have dropped, many lenders have adjusted their spread, resulting in similar “all in” rates to past months.
Monday, December 1, 2008
Friday, November 21, 2008
Another Victim of Economic Dip: Commercial Real Estate Finance
Ken Griggs - Associate Vice President, Portland
In recent months, the economy has been at the forefront of Americans’ minds. Stock market volatility, the residential sub-prime mortgage crisis, job losses, and lowered consumer spending have all received considerable attention.
Commercial real estate finance has also been seriously affected. Numbers are down and the nature of commercial lending has changed significantly, with stricter standards and stronger underwriting. Yet Portland remains one of the more stable markets.
This year, commercial real estate mortgage bankers that are doing well have seen production volume fall 30 percent; other brokerages that relied heavily on Wall Street conduit loans have seen even steeper declines. The industry is shrinking, and it will continue to do so for the next 12-18 months.
Less money is available for lending now than at any point in the past decade. Many lenders were crippled or wiped out by the meltdown on Wall Street, leaving fewer lenders in the market. The types of lenders have also changed, and today the most active lenders are life insurance companies and banks. Both of these sources are down too, though, and this trend is expected to continue well into 2009, if not 2010.
Life insurance companies are making fewer mortgage investments for a variety of reasons, including weaker product sales, better investment alternatives and general market uncertainty. When they can get a spread close to 500 basis points over a corresponding treasury, it doesn’t make a whole lot of sense to make a mortgage for less.
Banks are facing severe liquidity issues, and have drastically slowed their lending activity. Those with heavy exposure to sub-prime lending have been hit especially hard. They face higher reserve requirements and subsequently have less money to lend. Construction loans that have been routinely taken out on time are now having difficulty getting refinanced, further burdening banks’ liquidity and their ability to lend.
That’s not to say that lending has come to a standstill. Capital is still out there; it’s just harder to get and it looks different.
Lenders today are much more particular about who they lend to and how they structure the loan. Underwriting is more conservative and isn’t based on predictions of future performance. In the past it would not have been uncommon to see a loan with a 30-year amortization and periods of interest-only. Today it would be rare to find these values. Loan-to-value ratios have decreased from 80 percent to 65 percent as a norm, and debt service coverage is the key today.
Lenders are also bringing back recourse loans, which haven’t been common in the past decade and require borrowers to personally guarantee that they will pay back the loan. This can be a risky proposition, but some borrowers take this chance because they have confidence in the performance of their real estate or have few other alternatives.
Acquisition of commercial properties has slowed significantly, but investment is still occurring in all property types. Multifamily remains a preferred property type for lenders. In the aftermath of the residential sub-prime mortgage crisis, many potential home buyers are renting rather than buying, so vacancy remains low and the multifamily market continues to be fairly stable. As a result of the economic climate, much of the borrowing activity today is in refinancing.
Structured financing, such as mezzanine and bridge loans, has also become more prevalent. For instance, an investor may be seeking a loan of $5 million for a project, but a bank may grant only $4 million. In the meantime, the investor can acquire a $1 million structured loan, typically called the mezzanine piece.
Unfortunately, 2009 looks to be a rough year. The Urban Land Institute’s recently released “Emerging Trends in Real Estate 2009” predicts that the market will bottom out in 2009, which is not good news for areas that have been suffering for quite some time. Since Portland is generally affected by national trends later, it’s hard to predict how the rest of the downturn will unfold. So all parties are cautious and taking their time in making major financial decisions.
But professionals in Portland and the Pacific Northwest are hopeful for the area’s prospects in coming months and years. Though Portland just missed the top 10 in the ULI’s ranking of investment markets in the United States, it scored fairly high. Seattle ranked No. 1.
Portland’s fundamentals remain stronger than those in many cities. People are attracted to the area’s quality of life. Diversified employment and a growing green energy sector are providing new jobs and opportunities, and the area has not seen the vast foreclosures that have plagued other parts of the nation. These qualities make Portland attractive to lenders, so they’re investing in this community even in difficult times.
Coming months will likely bring additional challenges in commercial real estate financing, but lending is happening and the long-term outlook for the Portland market is good.
In recent months, the economy has been at the forefront of Americans’ minds. Stock market volatility, the residential sub-prime mortgage crisis, job losses, and lowered consumer spending have all received considerable attention.
Commercial real estate finance has also been seriously affected. Numbers are down and the nature of commercial lending has changed significantly, with stricter standards and stronger underwriting. Yet Portland remains one of the more stable markets.
This year, commercial real estate mortgage bankers that are doing well have seen production volume fall 30 percent; other brokerages that relied heavily on Wall Street conduit loans have seen even steeper declines. The industry is shrinking, and it will continue to do so for the next 12-18 months.
Less money is available for lending now than at any point in the past decade. Many lenders were crippled or wiped out by the meltdown on Wall Street, leaving fewer lenders in the market. The types of lenders have also changed, and today the most active lenders are life insurance companies and banks. Both of these sources are down too, though, and this trend is expected to continue well into 2009, if not 2010.
Life insurance companies are making fewer mortgage investments for a variety of reasons, including weaker product sales, better investment alternatives and general market uncertainty. When they can get a spread close to 500 basis points over a corresponding treasury, it doesn’t make a whole lot of sense to make a mortgage for less.
Banks are facing severe liquidity issues, and have drastically slowed their lending activity. Those with heavy exposure to sub-prime lending have been hit especially hard. They face higher reserve requirements and subsequently have less money to lend. Construction loans that have been routinely taken out on time are now having difficulty getting refinanced, further burdening banks’ liquidity and their ability to lend.
That’s not to say that lending has come to a standstill. Capital is still out there; it’s just harder to get and it looks different.
Lenders today are much more particular about who they lend to and how they structure the loan. Underwriting is more conservative and isn’t based on predictions of future performance. In the past it would not have been uncommon to see a loan with a 30-year amortization and periods of interest-only. Today it would be rare to find these values. Loan-to-value ratios have decreased from 80 percent to 65 percent as a norm, and debt service coverage is the key today.
Lenders are also bringing back recourse loans, which haven’t been common in the past decade and require borrowers to personally guarantee that they will pay back the loan. This can be a risky proposition, but some borrowers take this chance because they have confidence in the performance of their real estate or have few other alternatives.
Acquisition of commercial properties has slowed significantly, but investment is still occurring in all property types. Multifamily remains a preferred property type for lenders. In the aftermath of the residential sub-prime mortgage crisis, many potential home buyers are renting rather than buying, so vacancy remains low and the multifamily market continues to be fairly stable. As a result of the economic climate, much of the borrowing activity today is in refinancing.
Structured financing, such as mezzanine and bridge loans, has also become more prevalent. For instance, an investor may be seeking a loan of $5 million for a project, but a bank may grant only $4 million. In the meantime, the investor can acquire a $1 million structured loan, typically called the mezzanine piece.
Unfortunately, 2009 looks to be a rough year. The Urban Land Institute’s recently released “Emerging Trends in Real Estate 2009” predicts that the market will bottom out in 2009, which is not good news for areas that have been suffering for quite some time. Since Portland is generally affected by national trends later, it’s hard to predict how the rest of the downturn will unfold. So all parties are cautious and taking their time in making major financial decisions.
But professionals in Portland and the Pacific Northwest are hopeful for the area’s prospects in coming months and years. Though Portland just missed the top 10 in the ULI’s ranking of investment markets in the United States, it scored fairly high. Seattle ranked No. 1.
Portland’s fundamentals remain stronger than those in many cities. People are attracted to the area’s quality of life. Diversified employment and a growing green energy sector are providing new jobs and opportunities, and the area has not seen the vast foreclosures that have plagued other parts of the nation. These qualities make Portland attractive to lenders, so they’re investing in this community even in difficult times.
Coming months will likely bring additional challenges in commercial real estate financing, but lending is happening and the long-term outlook for the Portland market is good.
Tuesday, November 11, 2008
Seattle Market Overview
Andrew Patterson - Associate Finance Officer, Seattle
As the commercial real estate financing market is constantly changing, it is important to follow market trends. Vacancy rates, lease rates, and space absorption are just a few factors that can affect the value of the commercial real estate asset. Please find a summary of the recent market trends for each property type below:
Office Market
- Overall vacancy rate in
- 3rd quarter had negative absorption of 365,006 square feet
- Weighted average lease rates increased 3.3% to $38.50 psf
- Concern over WaMu’s potential to increase vacancy in the CBD
- 2.5 million square feet of speculative office under construction
Industrial Market
- Aerospace manufacturing increased 4,470 jobs YTD 2008
- 645,000 square foot IKEA Distribution Facility completed in
- 1.2 million square feet of industrial space currently under construction
- Port activity down 10% in
Multifamily Market
- Market vacancy moved up 70 basis points to 4.8%, excluding new construction
- Average rent $966, representing an 8% compound annual increase
- 16% of properties offering rent concessions compared to 10% one year ago
- 2000 new units in 2008, with a projected 6,400 new units in 2009
- Rents forecasted to climb 2.7% by next March
Retail Market
- Net absorption of 929,154 square feet in the 3rd quarter
- Average rental rates decrease marginally to $22.63 psf
- 3.7 million square feet of retail space currently under construction
- Taxable retail sales up over 3% in
Friday, November 7, 2008
Apartment Rental Rate Hikes Expected in 2009
Andrew Patterson - Associate Finance Officer, Seattle
A recent article in the Puget Sound Business Journal highlights a third quarter apartment market report from Marcus & Millichap with predictions of Seattle area apartment rents rising among the highest in the nation in 2009, by almost 6%. The article notes thePuget Sound area’s solid real estate fundamentals coupled with a long-term population growth outlook as key drivers to the region’s booming apartment market. The report projects that the area will add about 3,500 new units in 2009, representing a 66% increase over the previous 5-year average. As the median home price in King County
Although apartment sales have slowed by almost 30% in 2008, financing is still available at attractive rates and loan proceeds. Apartments continue to be the "property of choice" for the active lenders.
A recent article in the Puget Sound Business Journal highlights a third quarter apartment market report from Marcus & Millichap with predictions of Seattle area apartment rents rising among the highest in the nation in 2009, by almost 6%. The article notes the
Although apartment sales have slowed by almost 30% in 2008, financing is still available at attractive rates and loan proceeds. Apartments continue to be the "property of choice" for the active lenders.
Wednesday, November 5, 2008
Seattle Commercial Real Estate Market Ranks No. 1
Andrew Patterson - Associate Finance Officer, Seattle
The Commercial Real Estate market in Seattle was ranked the #1 investment market in the US by the ULI and PWC in their “Emerging Trends in Real Estate 2009”. The report is an assessment of commercial real estate assets in individual markets based on the views of more than 700 real estate experts, including developers, lenders, brokers, and consultants.
The report highlights strengths in “global pathway cities” such as Seattle, San Francisco, Washington D.C, New York, and Los Angeles. These cities all ranked in the top 5 for the 2009 investment outlook. Seattle benefits as a home to “brainpower industries” such as Microsoft, Amazon, Boeing, and Starbucks. Although, “sub-10 percent downtown office vacancies will rise”, the apartment market is strong throughout the region with low vacancy rates and solid rent growth forecasted for 2009. Low vacancy rates in the region’s retail markets protect against consumer slowdown, and the survey ranks Seattle among the strongest buys for industrial investment property
Quote from our President, J. Clayton Hering: “With an experienced mortgage banking team, a stable of quality and active lender relationships, and strong real estate fundamentals in all product types, we view the Puget Sound market as a growth market for mortgage financing in 2009 in spite of the constricted supply of capital."
The Commercial Real Estate market in Seattle was ranked the #1 investment market in the US by the ULI and PWC in their “Emerging Trends in Real Estate 2009”. The report is an assessment of commercial real estate assets in individual markets based on the views of more than 700 real estate experts, including developers, lenders, brokers, and consultants.
The report highlights strengths in “global pathway cities” such as Seattle, San Francisco, Washington D.C, New York, and Los Angeles. These cities all ranked in the top 5 for the 2009 investment outlook. Seattle benefits as a home to “brainpower industries” such as Microsoft, Amazon, Boeing, and Starbucks. Although, “sub-10 percent downtown office vacancies will rise”, the apartment market is strong throughout the region with low vacancy rates and solid rent growth forecasted for 2009. Low vacancy rates in the region’s retail markets protect against consumer slowdown, and the survey ranks Seattle among the strongest buys for industrial investment property
Quote from our President, J. Clayton Hering: “With an experienced mortgage banking team, a stable of quality and active lender relationships, and strong real estate fundamentals in all product types, we view the Puget Sound market as a growth market for mortgage financing in 2009 in spite of the constricted supply of capital."
Friday, October 3, 2008
Pacific Northwest: Bright Spot in Current Lending Landscape
The often-rainy Pacific Northwest turns out to be a bright spot in the current national economy. With the “best bones” of anywhere in the US, Portland and Seattle were two of only three metro areas nationally to show year-over-year home price appreciation in the latest data from Standard & Poor’s/Case-Shiller home price index. The Northwest is well above the national average in home price appreciation, has a low unsold inventory of homes, and stands at roughly half the national average for rates of foreclosure. In-migration continues to support housing demand, population is up, quality of life is unmatched, and the growth boundaries make metro areas positive pressure cookers. The Northwest’s historically weak spot, employment, is holding. Even smaller markets such as Boise and Spokane have good job growth and limited overbuilding. While the bad paper works its way through and Wall Street stabilizes, in the PNW cash is king and cranes are in the air.
Boomtown to the North
In Seattle, a booming local economy has attracted more and more branch offices of national corporations – more than supply can support. New construction won’t be available for occupancy until 2009 and until then, lease rates will climb. Current $50/sf rates may reach $65 by late 2008 – close to double year-ago rates. Local experts are calling 2008 “The Year of the Landlord.” Loan-to-value ratios will no doubt come down, but capital is still available for both stabilized and value-add deals.
Multifamily Hotter than Ever
Perception of a slowing condo market is a reality, and attention has shifted to multifamily development where favorable lending conditions and competitive underwriting make it the king of commercial product types for the moment. Though multifamily product as a whole still sees a net loss to condo conversions in the entire region over the past five years, the lagging pace of new construction helps to keep vacancy low and rents strong.
In Portland, skyrocketing rent growth over the past 10 months has not yet hit a ceiling. Seattle apartment vacancies are at their lowest level since 2000, and Portland’s were 3.3% in Fourth Quarter 2007. The tightening of finance availability for single family homes puts a whole new subset of individuals and families in search of an apartment.
Hot topics for 2008 are mixed-use urban villages on one-time industrial sites, urban infill projects and live-work developments such as Milepost 5 in Portland and others like it in Seattle, Spokane and Boise.
Flight to Quality Borrowers
Without question, 2008 will see a tightening of underwriting standards for commercial real estate. Cap rates may edge up late in the year but for now, will stay in a compressed state. A best guess is that the conduit lenders will be hard to find during the first half of the year. As “on book” portfolios begin to find favor, they will reappear. Until then, lending opportunities will be dominated by life insurance companies, who will pick and choose valued offerings. Good projects with quality borrowers will find dollars to meet their financing needs.
Boomtown to the North
In Seattle, a booming local economy has attracted more and more branch offices of national corporations – more than supply can support. New construction won’t be available for occupancy until 2009 and until then, lease rates will climb. Current $50/sf rates may reach $65 by late 2008 – close to double year-ago rates. Local experts are calling 2008 “The Year of the Landlord.” Loan-to-value ratios will no doubt come down, but capital is still available for both stabilized and value-add deals.
Multifamily Hotter than Ever
Perception of a slowing condo market is a reality, and attention has shifted to multifamily development where favorable lending conditions and competitive underwriting make it the king of commercial product types for the moment. Though multifamily product as a whole still sees a net loss to condo conversions in the entire region over the past five years, the lagging pace of new construction helps to keep vacancy low and rents strong.
In Portland, skyrocketing rent growth over the past 10 months has not yet hit a ceiling. Seattle apartment vacancies are at their lowest level since 2000, and Portland’s were 3.3% in Fourth Quarter 2007. The tightening of finance availability for single family homes puts a whole new subset of individuals and families in search of an apartment.
Hot topics for 2008 are mixed-use urban villages on one-time industrial sites, urban infill projects and live-work developments such as Milepost 5 in Portland and others like it in Seattle, Spokane and Boise.
Flight to Quality Borrowers
Without question, 2008 will see a tightening of underwriting standards for commercial real estate. Cap rates may edge up late in the year but for now, will stay in a compressed state. A best guess is that the conduit lenders will be hard to find during the first half of the year. As “on book” portfolios begin to find favor, they will reappear. Until then, lending opportunities will be dominated by life insurance companies, who will pick and choose valued offerings. Good projects with quality borrowers will find dollars to meet their financing needs.
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