A Few Articles of Interest

Seattle keeps on raking in the national recognition. Kiplinger recently ranked Seattle No. 2 on its "10 best cities for the next decade" list. It looked for cities that are innovative and have lots of out-of-the-box thinking. The article looks at Seattle's strong industries, like aerospace, life sciences (health), and clean tech.

Also, the CoStar Group had an article on commercial real estate lending and the recent Mortgage Bankers Association (MBA) quarterly survey. Commercial/multifamily loan origination reportedly increased 12% year-over-year for First Quarter, but was about a quarter lower than Fourth Quarter 2009. It appears that lending is loosening for office and retail properties, and there was a 131% increase in loans for life insurance companies.

Policom Says Seattle Metro Area has Nation's Strongest Economy

This week Policom Corp., an independent economics research firm based in Palm City, Florida, that specializes in analyzing local and state economies, released its annual economic strength ranking, which indicated that the Seattle metropolitan area has the strongest local economy in the nation.

"The rankings do not reflect the latest 'hotspot' or boom town, but the areas which have the best economic foundation," Policom President William Fruth said. "While most communities have slowed or declined during this recession, the strongest areas have been able to weather the storm."

The study measures 23 different economic factors over a twenty-year period to create the rankings. The formulas determine how an economy has behaved over an extended period of time. Data stretching from 1989 to 2008 was used for this study. Metropolitan areas must have a city of at least 50,000 people and typically encompass more than one county.

The Top 10 out of 366 metropolitan areas are:
1. Seattle-Tacoma-Bellevue
2. Washington, D.C.-Arlington,VA-Alexandria, WV
3. Denver-Aurora-Broomfield, CO
4. Houston-Sugar Land-Baytown, TX
5. Sacramento-Arden-Arcade-Roseville, CA
6. Salt Lake City, UT
7. Des Moines-West Des Moines, IA
8. San Diego-Carlsbad-San Marcos, CA
9. Madison, WI
10. Dallas-Fort Worth-Arlington, TX

Harding Arranges $1.2M in Financing for Lake Oswego Flex Building

NBS Financial Services Vice President Todd Harding has arranged $1.2 million in fixed-rate financing for Meridian Business Park Building D, a 19,450 sf flex building in Lake Oswego, Oregon. The borrower was a Portland-based family, and StanCorp Mortgage Investors was the lender.

Harding had some challenges to overcome on this transaction, as Building D’s single tenant had a year and a half left on its lease when Harding began working on the refinance, and the owner wasn’t sure if the tenant would renew.

But Building D’s many strengths outweighed this factor. Building D was built in 2003 and the tenant had put considerable work into improving the building’s production area. Plus, the 7-building, 200,000+ sf Meridian Business Park is completely occupied, which spoke to the lender about the quality of the borrower, who manages the property, and its ability to attract and retain tenants.

Much of the activity in commercial real estate finance today is in the multifamily market, but flex is a popular product type locally, Harding said.

“The majority of companies in the Portland area have fewer than 25 employees, so flex has always worked well here,” Harding said.

May Market Watch

During the month of April, the 10-year US treasury, the benchmark for commercial real estate lending, was extremely unstable. Throughout the month the 10-year treasury fluctuated by more than 30 basis points. A recent Wall Street Journal article noted that Morgan Stanley and Goldman Sachs, two of the best economic forecasting teams of the last few years, couldn’t differ more about where treasuries will go next. Morgan Stanley believes the 10-year will rise to 5.50% by the end of this year while Goldman Sachs believes it will fall to 3.25%. This 225 basis point difference represents a huge threat for corporate, consumer, and government borrowing costs. Goldman’s forecast would put rates near 5%, a generational low, while Morgan Stanley’s forecast would put rates past 7%, the highest in a decade.

Morgan Stanley’s head of interest rate strategy Jim Caron reasons that the market can’t endure the $2.4 billion worth of government debt that will be issued this year. He says, “We’ve never seen this much supply in the history of the bond market.”

Goldman’s view is that government borrowing is simply replacing private credit demand, which will return. “Ultimately, we don’t find supply to be of such great predictive power regarding what happens to interest rates,” says Goldman’s economist Jan Hatzius.

Regardless of future interest rate volatility, more and more lenders are allocating funds for commercial real estate loans this year. Life insurance companies are becoming more aggressive to win deals as conduit lenders are re-entering the market and banks are making loans for strong borrowers willing to transfer deposits. Interest rates are near all time lows and most owners and investors are taking advantage of low rates now, rather than risk going out to the market in the next 12-24 months.

Portland Multifamily Vacancy Down in First Quarter; New Properties Added to Report

Multifamily vacancy decreased more than half a percentage point to 4.82%. Downtown, however, saw a significant increase in vacancy. This increase resulted in the addition of new product; we added ten properties totaling more than 2,100 units to the report this quarter.

Our report tracks buildings of 100 units and above in the metro area; we consider smaller buildings in some submarkets if they lack many 100+ unit properties. This quarter we added the majority of downtown units that have come to market in the past 24 months, excluding three properties that are under construction or have very recently delivered: the Broadstone Enso, the Matisse, and Indigo 12 West.

With the additions to the report, downtown vacancy rose 5 percentage points to 10.15% and vacancy in new units came in at over 15%. The new units have impacted existing and historic downtown apartments by pushing down effective rents on existing units and creating a more competitive environment. Concessions like free rent and parking are thus being offered on new and seasoned units, and marketing has become considerably more aggressive. If the economy continues to recover, the downtown market could begin to stabilize by the end of 2010.

Market Trends
Apartment managers and investors report seeing a significant uptick in tenant traffic in the latter part of the quarter. This is a good sign but doesn’t necessarily indicate a recovery, which is contingent on two to three quarters of increased tenant traffic, a reduction in vacancy and increasing rental rates. The suburban markets have seen good absorption of new product, since there has definitely not been an oversupply, and submarkets like the Sunset Corridor, East County and the close-in eastside are truly tightening up.

The multifamily market is heavily dependent on the state of the local and national economy, and especially on the fragile job market. Considerable improvement in the job market should be reflected in quarter-over-quarter improvement in occupancy and rental rates. The bright spots locally are that companies like FedEx, Boeing, and Genentech continue to invest in the area. And despite challenges, Portland continues to grow. U-Haul pegged Portland’s growth rate at 10.16% (No. 3 in the country) for 2009, meaning the number of families renting U-Hauls to move to Portland was 10.16% higher than the number of families renting trucks to leave.