Some Positive Signs in Second Quarter for Portland Multifamily Market

Overview

Multifamily vacancy decreased to 4.11% during Second Quarter. Downtown Portland units continued to be leased up at a healthy rate, as vacancy for both new and seasoned units fell around 2 percentage points. Last quarter, this report began tracking a number of recent central city deliveries, and two new properties, the Matisse in South Waterfront (272 units) and the Broadstone Enso in the Pearl (152 units), will be added to the report when they are stabilized in 2011. Rental rates increased by $10 overall, or a cent per square foot, and as expected, downtown units led these increases.

Market Trends

It’s a good sign that vacancy is down and rents are increasing, and landlords are offering fewer concessions (except for new downtown properties), which indicates a healthier market. If new units continue to be absorbed at the current rate and the economy shows signs of solid recovery, we should see stabilization in 2011. But owners and managers remain guarded in their optimism, questioning whether recovery will occur without significant job creation, which we haven’t yet seen.

Despite the uptick in occupancy and some other positive indicators, the multifamily investment market remains sluggish. According to CoStar’s sales comparables, just two transactions over $3 million occurred during Second Quarter, one being the $38.75 million sale of the 188-unit Tupelo Alley in North Portland, which was a solid institutional sale. Investors remain uncertain about the region’s economic outlook, and worry that the Portland Metro Area doesn’t have one particular economic driver or growth engine, which may lead to a flat recovery. Companies are hunkered down, waiting to see significant improvement before investing, and the volatility on Wall Street in May didn’t help. Potential owners are also deterred by the increased costs of utilities and fees associated with owning and developing.

The deals being done in Portland and around the Pacific Northwest are at lower cap rates; this doesn’t necessarily indicate recovery, but of finding the ideal buyer on the transaction. Few aggressive buyers are currently active, though, and there’s little leverage to do deals. Financing remains challenging, with a limited number of lenders. Fannie Mae and Freddie Mac are the two most active lenders, and a number of other sources, like Chase and some life insurance companies, are becoming more active in pursuing deals.

The full report can be found here.

Retail Vacancy Flat in Second Quarter, Some Large Leases Signed

Overview

Retail vacancy was unchanged at 8.0% during the Second Quarter, with negative 20,547 sf of absorption. Vacancy in Central City decreased nearly a percentage point to 10.9%. Vacancy in Southeast/East Clackamas increased more than a percentage point to 6.5%, with more than 20,000 sf of negative absorption each at Clackamas Town Center and Hilltop Mall. However, there was considerable leasing activity in big-box stores that are not tracked in our report. For instance, Salvation Army leased about 40,000 sf at the former Linens ‘n Things on SE 82nd, and Dick’s leased the nearly 50,000 sf former Joe’s Sports, Outdoors & More at Johnson Creek Crossing in Clackamas.

Vancouver vacancy rose by half a percentage point to 11.0%, with 46,688 sf of negative absorption. At Columbia Square – Vancouver, 20,000 sf became available. This is a portion of the former Joe’s Sports, Outdoor & More space, which is partially occupied by Chuck’s Produce (expected to open in August).

Noteworthy News

Closely watched indicators of the health of the retail market were mixed during the Second Quarter. Retail sales grew by a seasonally adjusted rate of 0.6% in April, but fell by 1.2% in May. The Conference Board’s Consumer Confidence Index also dropped by almost 10 points to 52.9 in June. Economists didn’t expect such a significant decrease, as the index had been rising since February.

Portland continues to attract large tenants of all kinds. In recent months, Ultimate Electronics, which was acquired by Hollywood Video founder and former CEO Mark Wattles, leased the 40,000 sf former Levitz Furniture building in Beaverton. Two new clothing stores are also in the works: H&M confirmed its Pioneer Place store will open this fall, and Saks Fifth Avenue Off Fifth will open at Bridgeport Village September 2. Nordstrom Rack also leased 48,344 sf at Cascade Plaza Shopping Center.

Signs of life were present in the Portland retail investment market during the Second Quarter. Retail Opportunity Investments, Corp., purchased Vancouver Market Center in Vancouver for $11.19 million, and is under contract to purchase a portfolio of four other centers in the Portland Metro Area from Gramor Development for about $90 million.

Though retail development has slowed, with our report tracking just under 30,000 sf of space under construction in the metro area, some activity and future planning is occurring. Big Al’s, the popular bowling center in Clark County, has a second 66,000 sf location under construction at Progress Ridge in Beaverton. It is expected to open in August, and developers hope the site will also be the future home of New Seasons and Cinetopia.

The full report is available here.

Portland Industrial Vacancy Increases Slighlty in Second Quarter

Overview

Industrial vacancy rose less than a percentage point to 15.24% during Second Quarter, with negative 354,330 sf absorbed. Southeast saw a significant increase in vacancy, to 14.35%, as United Stationers Supply Co. vacated 40,608 sf at Commerce Park – McLoughlin and relocated to 195,510 sf at Rivergate Corporate Center III in the North/Northeast submarket. Vancouver vacancy also increased about four percentage points to 15.44%, and Columbia Business Center had more than 450,000 sf available. Significant leases of the quarter included Consolidated Molding & Millworks leasing 48,000 sf and Stanton Furniture leasing 92,960 sf at 115th Commerce Park in Southwest I-5.

Flex vacancy increased slightly to 18.23%, with negative 23,633 sf absorbed, down considerably from First Quarter’s negative 166,559 sf of absorption. Vacancy in the North/Northeast submarket fell about 5% to 12.09%, and Columbia Gorge Corporate Center saw considerable activity, with Multnomah County leasing 18,150 sf and Pac/West leasing 11,950 sf.

Market Trends

Greenlight Greater Portland, a privately funded economic development group, released a report in June suggesting that manufacturing will be a major factor in Portland’s economic recovery. It predicted that the manufacturing sector could grow by 14% in the next five years.

Renewable energy companies, particularly solar power companies, continue to be active players in the Portland industrial market. Solexant Corp. is expected to receive a $25 million state loan to build a factory in the metro area to develop ultra-thin-film solar cells. The plant would initially employ 100, and could rise to the same capacity as SolarWorld in Hillsboro, which will employ 1,000 by this fall when its expansion is completed. ReVolt Technology, a battery maker, also won a $5 million U.S. government grant that will help it build a Portland plant to develop a battery for plug-in vehicles.

In other major transactions, Farwest Steel will acquire more than 20 acres from the Port of Vancouver for about $5 million. The company will build a $20 to $30 million steel processing and distribution facility that will create 125 new jobs and employ about 200 overall.

The full report is available here.

Portland-Area Office Vacancy Increases During Second Quarter

Central City office vacancy increased to 12.73% during the Second Quarter, with negative 242,145 sf absorbed. About 40,000 sf of this negative absorption was from multiple tenants leaving the historic Stevens Building. The Church of Scientology of Portland purchased it in 2008 and planned to inhabit the whole building, but it was found to be unsuitable for the organization and is for sale. This quarter the Church of Scientology bought downtown’s historic Sherlock Building for $6.4 million to serve as its new home. In a highly-anticipated decision, the Portland Development Commission opted to remain at its current location in Old Town (but in 10,000 fewer sf), rather than move to the stalled Park Avenue West, its other primary option. It is uncertain when construction will restart at Park Avenue West, as the project lacks financing. Active tenants downtown include alternative energy groups, who seek environmentally friendly buildings. Many tenants are also seeking moderatelypriced Class A buildings with quality buildouts.

Suburban office vacancy rose about two percentage points to 23.92%, with negative absorption of 179,725 sf. This is the 7th consecutive quarter of negative absorption for the suburbs. Kruse Way saw the most significant increase in vacancy, from just under 23% last quarter to 29.36% during Second Quarter. Kruse Woods V had nearly 100,000 sf of negative absorption, as Northwest Evaluation Association vacated about 108,000 sf to move to the former Port of Portland building in Central City. However, Black & Veatch filled some of the space at Kruse Woods V, leasing about 25,000 sf. Vacancy in I-5 South rose significantly to 28.10%, but some large leases occurred, including State Farm’s lease of nearly 24,000 sf at Fanno Creek Building B. Brokers are seeing a flight to quality in the suburban submarkets, with healthy activity in nicer buildings.

Vancouver vacancy rose slightly to 18.55%, with negative 11,634 sf absorbed. The most significant deal was the $18.5 million sale of The Columbian Building to the City of Vancouver for its new city hall. The 118,000 sf building, previously listed at $41.5 million, was turned over to Bank of America early this year after the Columbian Publishing Co. filed for bankruptcy.

The full report is available here.

Henderson Arranges $4.6M for Snohomish Self Storage

NBS Financial Services' Jeff Henderson has arranged $4.6 million in financing for Snohomish Self Storage in Snohomish, Washington, about 30 miles northeast of Seattle.

Snohomish Self Storage has 707 storage units and 281 RV/parking spaces. It was built in 1999 and sits on about 8.5 acres.

The borrower originally tried to gain financing through two local banks, but was unsuccessful. After contacting Henderson, he utilized NBS Financial’s Strategic Alliance Mortgage (SAM) network to find lenders interested in financing the property. NBS Financial is a member of SAM, whose goal is to combine local expertise, while leveraging a national platform with 20 other select mortgage banking firms across the country, to provide a broad reach of capital from local, national and international sources.

Arranging financing for self storage is considerably different than for other commercial property.

“Many lenders look at self storage as more of a business than real estate, which may be a deterrent to lending,” Henderson said. “Having so many RV and parking spaces was also a challenge. We had to dig deep to find the right match for the borrower.”

June Market Watch: State of the Commercial Real Estate Market

A recent quarterly survey by Real Estate Roundtable suggests the commercial real estate market is beginning to stabilize. The group surveyed more than one hundred senior real estate executives for its quarterly report. 82 percent believe market conditions today are better than they were a year ago and seventeen percent characterized conditions as “much better.”

Roundtable CEO Jeffrey DeBoer said, “Clearly, the sense of gloom that prevailed a year ago has eased, property values no longer seem to be in a free-fall and market participants are feeling more confident.” The survey also noted that financing can be challenging for some properties, as defaults are still rising. Transaction volume is down 80 to 90 percent and values are down nearly 50 percent in some markets. “What’s needed now is robust job creation, more equity and restoration of secondary market financing so that banks can clear their balance sheets of toxic assets and begin lending again to credit-worthy borrowers," DeBoer said.

In mid-May, Marielle Jan de Buer (CMBS) and Thierry Perrein (REITs) hosted roundtable discussions in New York and Boston about the current state of commercial real estate lending. Below are some highlights:
• The tone in the debt markets has changed dramatically in the past two quarters; liquidity is flowing back into the market.
• There has been an increased appetite for commercial real estate loans in general.
• Sponsors are refinancing (instead of extending) and recapitalizing while acquisitions are heating up.
• Competition among lenders is increasing-spreads are coming in.
• Life insurance companies and banks are fi lling the void left by CMBS.
• Life insurance companies have targeted $32 billion of origination in 2010 (up from $18 billion in 2009).
• The overall resurgence in the capital markets coupled with the lack of available product has led to greatly improved pricing and leverage.

As the economy and the commercial real estate markets continue to improve, NBS Financial Services is consistently quoting and closing loans for well located, cash-flowing real estate at the 65-75 percent loan to value levels. Our 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. Call us today to secure financing for your apartment, office, retail, or industrial property.

Issues Affecting Commercial Mortgage Rates:
• Lukewarm treasury auctions throughout the month as European economic crisis looms.
• The recent move in Treasury rates caused swap spreads to widen as rates fell across the yield curve.
• Loan sales market is booming, $2.6 billion of loans on the market for sale through the end of June.
• Increase in loan demand last 60 days (balance sheet and CMBS execution).