Wednesday, May 6, 2009

Market Watch: May 2009

Lending activity tightens in April; Seattle a bright spot for commercial real estate lending

As spring begins a fresh start for Mother Nature, we see the commercial real estate market continuing to deteriorate. Many lenders are tightening their underwriting standards and continuing the trend to lend conservatively, to proven borrowers, on well located and performing commercial real estate properties. Lenders are underwriting higher cap rates, or the ratio of net operating income to market value, cutting a property’s value and impacting loan amounts. Loan-to-value ratios today are commonly in the 60%-65% range, rather than the 75%-80% range of 24 months ago. Because many lenders have less money to lend than in previous periods, they are becoming more and more selective. Most deals that have any issues regarding vacancy, trending performance, or lease rollover are immediately getting kicked out. We continue to see loans that come due and refinancing is next to impossible due to perceived risks from the lender and an overleveraged existing loan.

The 10 year US Treasury, a benchmark for commercial real estate lending, climbed more than 45 basis points in April. As the government continues to increase the supply of treasuries in the market, we have seen this rate climb almost 90 basis points since the beginning of the year. Various sources report that the "target" for the 10 Year Treasury rate is about 3.0% to keep credit flowing through the economy. The Fed continues to purchase treasuries to keep rates low and combat inflation, but seems to be losing the battle given the recent rise in treasuries.

Though the capital markets have been challenging, we are still signing up and closing loans for well located and moderately leveraged deals all over the Northwest. Our correspondent Life Insurance Company lenders have money to lend and see the Pacific Northwest as one of the strongest markets in the country to invest in. Rates are still near historic lows for the right deal. Now is the time to talk with an NBS Finance Officer to secure financing for your apartment, office, retail, or industrial property.

April 2009 Treasury Highlights:
• April 10 Year Treasury High: 3.12% on April 30th
• April 10 Year Treasury Low: 2.66% on April 1st

1st Quarter ‘09 Local Market Vacancy by Property Type:
• Apartment: King Co. - 6.8%, Pierce Co. - 6.0%, Snohomish Co. - 6.8%
• Industrial: Seattle - 2.28%, So. King Co. - 4.21%, Snohomish Co. - 8.56%
• Retail: Seattle - 3.4%, Eastside - 4.9%, Southend - 6.1%
• Office: Seattle - 11.9%, Eastside - 14.1%

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