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.

Portland Retail Vacancy Rises During Fourth Quarter, But Some Positive Signs

The Portland area’s overall retail vacancy rose about half a percentage point to 8.0%, with negative 293,920 sf of absorption. Central City saw the greatest increase of 1.5% for a total vacancy of 11.7%, the highest of any submarket. Nearly 15,000 sf is currently available at One Main Place, and Pioneer Place has about 50,000 sf available. Vacancy also rose nearly a percentage point in the Southeast/East Clackamas and Eastside submarkets. Vancouver vacancy stayed steady at 10.5%, though 59,573 sf was absorbed at Columbia Square. The 93,000 sf Bowyer Marketplace WinCo store, at the corner of NE 119th Street and 117th Avenue, delivered this quarter.

Construction remains slow, with 24,499 sf under construction throughout the Metro area. 17,000 sf of this is a freestanding building at 13233 SE McLoughlin in the Southeast/East Clackamas submarket.

Noteworthy News
The national retail market is showing signs of a slow recovery. Consumer spending rose for the fifth straight month in February, by 0.3%, according to the Commerce Department. And the International Council of Shopping Centers (ICSC) expects retailers to close fewer stores in 2010 than in 2009. But many retailers continue to face challenges, and Saks Fifth Avenue announced that it would close its two downtown Portland stores. It is rumored that Swedish retailer H&M will take over the 23,000 sf men’s store, and Saks will vacate the 60,000 sf main store by the end of July. Area officials are working to find a quality tenant for this space. In one bit of good news, Saks may open an Off Fifth store, which offers discounted designer clothing and accessories, at Bridgeport Village.

Though restaurants have been challenged during the recession, Portland’s restaurant scene has remained solid. Affordable, casual restaurants have generally fared better during the recession than their higher-priced counterparts, so many are focusing on this market. For instance, Foster Burger opened late last year in Southeast, and Little Big Burger is expected to open in Northwest this spring. Some of Portland’s popular food carts are even opening storefronts – Korean taco truck Koi Fusion, has opened a restaurant on NW Lovejoy. Some higher-end restaurants are also in the works – Lucier is expected to reopen in South Waterfront, and a group from San Francisco plans on opening a restaurant in the former Bay 13 space in the Pearl.

Specialty grocery stores have continued to do relatively well. The Whole Foods Market on NE 43rd and NE Sandy in Hollywood opened in January, and work has begun on the New Seasons Market on SE 40th and Hawthorne, which has long been delayed but is expected to open this fall.

Featured Deal: John’s Incredible Pizza Lease
John’s Incredible Pizza, a family entertainment restaurant with ten locations in California, is opening its 11th location in Portland. John’s leased 46,212 sf at the former Circuit City at Washington Green Shopping Center, 9180 SW Hall Boulevard, Tigard. John’s features a pizza, salad, soup, pasta and dessert buffet, as well as themed dining rooms and carnival-style rides and video and ticket-dispensing games. It’s expected to open in First Quarter 2011. NAI NBS Real Estate Broker J.J. Unger and NAI Capital Senior Vice President Irwin Hyman of Encino, California, represented the tenant.