Is Commercial Real Estate the Next Storm?

Has the commercial real estate market reached bottom? Or do we have yet to see the worst? This is the question Denis O'Neill, an NAI NBS broker who specializes in the sale of retail properties and land, addresses in a column in today's Daily Journal of Commerce.

Here's an excerpt:

Just when it appears we finally have some good economic news, many investors wonder if another financial storm is brewing. The residential market, if not at the bottom, appears close to it. Though the number of residential foreclosures and loans 90 days past due are still rising in 2010, and unemployment is holding steady, few experts see significant additional drops in residential values on the horizon.

So is commercial real estate the next shoe to drop?

Of the $3.4 trillion in commercial debt outstanding, a congressional oversight panel in February estimated that $1.4 trillion will reach maturity between now and 2014; up to 50 percent is held by local banks. Residential defaults led the way, particularly development loans. With plummeting values and no income stream, these loans were the first to be turned back to lenders. Banks’ problem loans are near-term and dwarf the $380 billion of commercial mortgage-backed securities debt that matures from 2015 to 2017. Furthermore, the vast majority of bank exposure to these securities is held by large banks. The big banks have demonstrated the ability to both raise equity and generate profits.

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New Report Says CRE Industry is Leveling Off

A recent survey of senior real estate executives suggests that the commercial real estate market is leveling off, but uncertainty remains about how the recovery will play out.

The Real Estate Roundtable’s quarterly “Sentiment Survey” for Second Quarter 2010 was released this week, and provided some hope that commercial real estate has reached bottom. It also said more capital is available, but is limited by markets and property types.

Our friends at NAI Global posted this summary:

Of the 100+ senior real estate executives participating in the Q2 survey, 82% characterized market conditions today as better than a year ago (up from 73% in Q1), although only 17% said conditions are “much better.” The “Current Conditions” index hit a low point of 17 in Q4 2008 (during the near-collapse of U.S. financial markets); rose to 56 in the final months of 2009; and now stands at 74.

“Clearly, the sense of gloom that prevailed a year ago has eased, property values no longer seem to be in a freefall, and market participants are feeling more confident,” said Roundtable President and CEO Jeffrey DeBoer. “But, while sentiment is up, that’s not to say things are ‘good.’ Refinancing remains difficult for many and defaults are still rising, which means more pain ahead.”

In a sign that values may be leveling off, only 28% of those polled perceived asset prices today as lower than they were a year ago, compared with 57% in the previous quarter. Correspondingly, 46% said valuations today are better than a year ago, compared with only 22% in Q1. Looking ahead, 56% expect valuations to be “somewhat higher” a year from now and 35% expect them to remain “about the same,” compared to 42% and 35%, respectively, in the previous survey.

In another important metric, the Q2 survey shows “signs of life” in the debt and capital markets, although numerous respondents qualified their statements by saying improved availability is limited to certain parts of the market or types of properties (e.g., with positive cash flows). Of the 65% who said debt capital is more available today than one year ago, 27% characterized availability as “much better.” By contrast, only 19% of Q1 survey participants felt conditions were “much better” than a year earlier.

On the equity side, 76% said availability is better than one year ago (with 26% characterizing it as “much better”). However, the number of respondents predicting conditions will be better “one year from today” declined from 75% in Q1 to 66% in Q2, with a corresponding increase in the number who expect equity availability to remain “about the same.”

What do you think? Is your market seeing signs of life?

Overall Portland Multifamily Vacancy Down in First Quarter; NAI NBS Adds New Properties 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 Market Vacancy Increases During First 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.

Three NAI NBS Brokers Earn CCIM Designation

NAI NBS' Neville Bassett (Portland), Doug Bartocci (Vancouver), and Garret Harper (Vancouver) have obtained the Certified Commercial Investment Member (CCIM) designation.

A CCIM is an invaluable resource to the commercial real estate owner, investor, and user, and is among an elite group of more than 9,000 professionals across North America and in 30 countries abroad. Only 6 percent of the estimated 150,000 commercial real estate practitioners nationwide hold the CCIM designation, an indication of one of the most coveted and respected designations in the industry.

To attain the CCIM designation, each broker completed four core courses, an ethics course and three elective credits, prepared a portfolio and passed a comprehensive exam.

PDX Industrial Market Looking Up in First Quarter

Industrial vacancy decreased slightly to 14.56%, with 118,458 sf absorbed. Vacancy in North/Northeast remained stable at 17.58%. Some large leases were signed in this submarket, including Owens Corning leasing 123,120 sf at Bybee Lake Logistics Center – Phase II. Ferrotec USA and Archive Systems also signed leases at Birtcher Center @ Townsend Way totaling 81,850 sf. Vacancy in Vancouver decreased about 1.5 percentage points, as 82,800 sf was leased up at Hart Industrial Center, bringing that property to 100% occupancy, and 40,267 sf was leased at Westside Business Center.

Flex vacancy rose nearly two percentage points to 18.01%, with 166,559 sf of newly available space coming back on the market. Much of this space can be accounted for by Intel, which vacated more than 100,000 sf at the Amberglen Business Center in moving back to its headquarters, pushing Southwest Sunset’s vacancy up more than two percentage points to 19.71%. Some positive absorption did occur, though. BiAmp Systems leased 50,963 sf at Nimbus Corporate Center in the Southwest 217 submarket, whose vacancy stayed fairly flat at 17.76%.

Market Trends
The industrial market showed continued signs of a slow but steady recovery during First Quarter. Vacancy in the Portland metro area, though still high, appears to have stopped rising, and construction and new deliveries have been so limited of late that the market isn’t burdened by oversupply. National economic indicators were looking up. Factory orders rose 1.7% in January, the largest increase in four months, with heightened demand for commercial aircraft, and industrial production rose 0.1% in February.

Manufacturers continue to invest in the Portland metro area. LaCrosse Footwear is moving production of Danner boots to a new 59,000 sf factory about a mile from its Northeast Portland headquarters, a facility twice the size of its current plant, which it is replacing. Production is expected to begin there in Third Quarter 2010. Boeing is also investing up to $120 million in upgrading its operation in Gresham, which will add 152 jobs in the next three years. It will build a new 60,000 sf facility on its 87-acre campus where it will treat metals used in making commercial aircraft.