September Market Watch: National Economy and Commercial Real Estate Loans

As the summer comes to a close and the recent stock market rally subsides, borrowers are left wondering what the future will bring for commercial real estate loans. At the end of August there were several treasury issuances that were well received by the market as more than $16 billion of new notes issued were digested easily. In late August, Fed Chairman Ben Bernanke said that “prospects for a return to economic growth in the near term appear good."

The end of summer brought a jump in existing home sales, improvement in consumer sentiment, and increased consumer spending, in part due to the successful cash for clunkers program. Even with the issuance of new treasuries, the 10-year treasury rate fell for the month of August with help from the positive economic news. The 10-year treasury was down almost 50 basis points for the month. A combination of lower treasury rates and contracting lender spreads means attractive interest rates on quality, performing commercial real estate debt.

As the economic news improves, we are seeing lenders becoming more active in the commercial real estate lending market. A few months ago, it seemed that there were very few players in the market, mainly life insurance companies with very conservative loans or banks lending to repeat borrowers in an effort to control deposits. Several life insurance companies and banks that have been inactive over the past year are beginning to come back into the market.

While still underwriting conservative cap rates and trending performance, lenders are becoming more competitive to win quality deals. A typical commercial real estate loan in today’s market is less than a 70% loan to value, greater than a 1.25x debt service coverage ratio and has an interest rate from 6.0% to 7.50% based on term, loan to value, asset type, and location.

August 2009 Treasury Highlights:
August 10-year treasury high: 3.85% on August 9
August 10-year treasury low: 3.39% on August 31

Issues Affecting Commercial Mortgage Rates:
· 10-year treasury declined almost 40 basis points during the month
· $16 billion of new treasury supply released in the last two weeks of August was well received by the market and treasury rates actually moved lower
· Federal Reserve continuing Treasury repurchase program to help stabilize the price as the new issuances continue

August Market Watch: Update on Seattle CRE

Second quarter 2009 market reports show that Seattle’s commercial real estate market is not immune to the struggling economy, but compared to the rest of the country, we are performing quite well. Here’s an update on the apartment, industrial, office and retail property types in the Seattle/Puget Sound region:

Apartment: Seattle's strongest property type has seen an increase in vacancy rates with only a small rent decrease, although many owners have begun to offer leasing concessions. The vacancy rate increased to 6.6% from 4.8% last fall, but strong submarkets like Capitol Hill and U-District remain at well under 5%. The average rental rate in the region was $988, down less than 1% from six months ago. The average rental concession was $733 (on a 12-month lease) with about half of the buildings offering a concession.

Industrial: The strongest performing property type after apartments, overall Seattle area industrial vacancy was 7.0%, with overall average blended rental rates of $0.63 psf/month. The 7.0% vacancy rate represents a 90 basis point increase from the previous quarter. Flex buildings averaged 9.6% vacancy, while warehouse buildings were 6.7% vacant. The $0.63 psf/month rental rate represents a 0.7% increase from the previous quarter. Cap rates have increased about 150 basis points from a year ago. The strongest submarkets included the Southend (Auburn & Kent Valley) and close-in Seattle with vacancy rates under 5%.

Office: Office buildings have seen the most stress in 2009, resulting in an overall vacancy rate of 11.2%, according to CoStar. Class C office space has seen the smallest increase in vacancy rate while class A & B vacancy rates have increased between 150 and 200 basis points. The average rental rate was $27.03 psf/yr, a 3.3% decrease from the first quarter 2009. Cap rates have increased by about 90 basis points, averaging 7.46, although few sales have taken place in the last 12 months.

Retail: Retail vacancy has increased 50 basis points from first quarter to 6.1% and rental rates ended the quarter averaging $20.60 psf/year. Since second quarter 2008, retail vacancy has increased steadily from 4.5% to the current 6.1%. As the economy challenges retailers, we expect to see an increase in vacancy rates through 2010. The average rental rate is down over 4% since 1st quarter and over 9% in the last year. Cap rates have increased almost 150 basis points in the past year. Similar to office properties, transaction volume is significantly lower than the previous four quarters.

*Vacancy and rental rates taken from CoStar and the Dupree & Scott local market reports.

NBS Financial #7 on List of Top Commercial Lenders

NBS Financial Services placed #7 on the Portland Business Journal's list of the Top Commercial Lenders for the Portland metro area, ranked by dollar volume of commercial loans in 2008. NBS Financial's Portland office closed 37 loans worth a total of $242 million during 2008. The company moved up two spots after being ranked #9 on the previous year's list.

Second Quarter 2009 Reports for Portland Metro Area Show Recession's Impact

Second Quarter 2009 quarterly reports for office, industrial, retail and multifamily commercial real estate in Portland, Oregon, as well as the general economy, are up on our Web site.

While central city office vacancy remained stable from the previous quarter at 10.33%, with 47,803 sf absorbed, vacancy in the suburban markets increased nearly two percentage points to 19.06%, with -183,415 sf absorbed. Vancouver office vacancy also rose, to 17.71%.

Industrial vacancy rose to 13.87%, with -515,518 sf absorbed. Industrial sales have slowed considerably, but SEH purchased the Hewlett-Packard campus in Vancouver for $55 million in late June.

Vacancy in the retail market rose to 7.1%, and the negative absorption of 240,321 sf occurred in some larger spaces, such as Joe’s Sports & Outdoors vacating 55,120 sf at Gresham Town Fair. Construction has slowed, but work continues on the Cascade Station Target, expected to deliver this November.

Multifamily vacancy rose slightly to 5.03%, as the poor economy has caused renters to double up or move in with family. Rental rates remained flat, and landlords are increasingly using incentives to attract potential tenants.

The full reports can be found here.

NBS Financial’s Wood Arranges $2.6M for Woodinville Industrial Building

NBS Financial Services Executive Vice President Mike Wood has arranged $2.6 million in financing for Underwood Gartland 216, a 71,750 sf warehouse/distribution building in Woodinville, Washington.

Symetra Life Insurance Company was the lender, and Underwood Gartland 216 LLC the borrower. This loan was a refinance of a maturing loan, and had a 5-year term, 25-year amortization, and a 43% loan-to-value ratio. Underwood Gartland 216 was built in 1999.

In these challenging financial markets, lenders are looking to lend on the strongest and most stabilized projects. So the fact that Underwood Gartland 216 was only 65 percent leased at the time of the loan provided a bit of a challenge, but not an insurmountable one, said Wood, of NBS Financial’s Seattle office.

“The borrower had enough income and cash-flow to qualify for the loan, and the lender recognized the quality of the real estate,” Wood said.

NBS Financial was Symetra’s top correspondent nationwide in 2008.

July 2009 Market Watch

Economic Outlook:
The FOMC met at the end of June and had some interesting insight into the future of the US economy. According to the Department of Commerce, US real GDP will begin to stabilize in the second half of ‘09 after contracting about 6% in each of the two previous quarters. This is an indication that economic growth might begin in 2010. A few reasons for the positive outlook include a slowing of speculative investment in the oil and housing markets, improved credit flows expected to unlock pent-up demand, slowing of businesses liquidation of inventory and other self-correcting actions, and bold changes in global monetary and fiscal policy.

Lending Environment:
In late June, the Mortgage Bankers Association released its First Quarter report showing a dramatic drop in loan origination from ‘08 to ‘09. Overall, originations are down about 70% from First Quarter ‘08. There was a 96% decrease for CMBS originations, 80% for banks, 60% for life insurance companies, and 25% decrease for GSEs (Fannie & Freddie). Even with the large decrease in originations, life insurance companies and GSEs are still very active in today’s market.

Refinancing Challenges:
The first two quarters of ‘09 have also brought some new challenges to light for many borrowers. Many loans that were originated in the past five to ten years are underwater or showing sings of stress due to lower rental rates, increasing vacancies, and higher underwriting capitalization rates. Many borrowers are realizing that they will need to bring equity to the table when refinancing an aggressive loan that was made less than ten years ago. It is prudent now more than ever to think through financing options well in advance of a loan maturity. Many proactive owners are already refinancing debt that expires three to five years out as current interest rates are historically low and there is a general uncertainty about inflation and the future of interest rates.

Commercial RE Loans:
There are commercial real estate lenders active in today’s market. Life insurance companies typically have an allocation each year for commercial real estate loans that they need to make in order to match debt to the different insurance products they sell. Life insurance companies alone originated about $2.62 billion in commercial real estate mortgages in First Quarter ‘09. With the recent spike in treasuries over the past two months, we have seen commercial mortgage rates rise slightly but they are still at all-time lows. It is always best to discuss financing needs early and often, so you aren’t surprised when it's time to obtain financing for an acquisition or to refinance an existing loan.

June 2009 Treasury Highlights:
• June 10 Year Treasury High: 3.95% on June 10th
• June 10 Year Treasury Low: 3.48% on June 29th

Issues Affecting Commercial Mortgage Rates:
• Steepened yield signaling an economic recovery may begin toward the end of 2009 and into 2010
• US Treasury rates remain volatile as the issuance of treasuries by the US government is offset by the treasury repurchase program
• Federal Reserve voted to hold the Fed funds rate target at 0-0.25%