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.