Third Quarter Reports for Portland Market Released

NBS Financial has released its Third Quarter 2009 quarterly reports for office, industrial, retail and multifamily commercial real estate, as well as its economic report.

Office vacancy in Central City rose slightly from the previous quarter to 11.12%, with -272,692 sf absorbed. Two Class B buildings in Northwest were major contributors to this rise in vacancy and negative absorption. Vacancy in the suburban office markets rose about a percentage point to 20.59%, and Vancouver office vacancy rose to 18.42%.

Industrial vacancy increased to 14.94%, with -531,805 sf absorbed. One positive sign for the industrial market this quarter was Daimler Trucks North America’s decision to keep its Swan Island plant open. The plant had previously been scheduled to close in June 2010.

Vacancy in the retail market rose to 8.0%, with 365,818 sf newly available. The closure of all Joe’s Sports & Outdoors stores helped contribute to the increased vacancy, but Dick’s Sporting Goods leased a few previous Joe’s locations in the metro area.

Multifamily vacancy decreased slightly to 4.64%, which can partly be attributed to more tenants being active during the summer months; some landlords offered rent concessions and other incentives to attract tenants. Multifamily rental rates rose slightly.

A PDF of all of the reports can be found here.

October Market Watch: Commercial Real Estate Loans and Economic Recovery

In recent weeks, many media outlets have reported that the worst is over and the US economy has bottomed out. Unemployment rates are still rising, currently at 9.7%, but at a declining rate. The S&P rose by 15% in the second quarter and by an estimated 12% in the third quarter. The Dow is inching toward 10,000 again after bottoming out near 6,500 in early March. Household net-worth has grown 3.9% from the first quarter 2009, the first such increase in 24 months. These are all good signs that the worst may be over on a national economic scale, but how does this translate to the commercial real estate market and commercial real estate loans?

Commercial real estate, especially in Seattle, will lag the trend. Many industry professionals see the next 18 months as the bottom for commercial real estate. Properties are just beginning to feel the effects of the unemployment increase. The market is offering leasing concessions as leases roll while companies decide how to improve their bottom line. Many of the outstanding loans that were originated 5-10 years ago are performing now, but will be stressed when they need to be refinanced in the next 24-48 months. Lenders will continue to tighten underwriting as property values decrease due to cap rate inflation and lower rents. LTV ratios for new loans are significantly less than in recent years, and market fundamentals are causing a decrease in NOI at most properties. These factors are stressing lenders’ real estate portfolios. There will be an estimated $1.4 trillion of loan maturities from CMBS, Life Insurance Companies, and banks over the next 5 years, the same amount maturing over the last 15 years.

Today’s commercial real estate loan will be more conservative; it will have a higher underwritten cap rate, increased underwritten vacancy, “market rent” adjustments, and a lower loan-to-value. Most investors are still sitting on capital, waiting to invest. Despite all this, for quality, well-performing assets, there is money ready, willing and available. Expectations are that there will be increasingly more capital available in 2010 as lenders compete to earn yield on cash. Rates are still near all-time record lows and owners are encouraged to lock in an attractive interest rate for a long term to avoid having to go out to the market in the next 12-48 months.

Issues Affecting Commercial Mortgage Rates:
· Falling treasury rates and compressing spreads provide attractive interest rates to borrowers seeking conservative commercial loans
· CMBS delinquency nearing 6.5%, more than 6 times the amount 12 months ago
· Unemployment, increasing vacancies, and declining rental rates impacting property net operating income.

NBS Financial's Wally Harding Authors Column on RE Business Online

NBS Financial's Wally Harding, a Senior Vice President with more than 40 years of experience in the commercial mortgage banking business, writes about the commercial real estate finance market in a column on RE Business Online. Harding speculates on whether we've reached bottom, and what we can expect in the months to come.