South Sound Commercial Real Estate Report

by Coldwell Banker Evergreen Olympic Realty, Inc. on May 19, 2011

It is college graduation time.  Unless they are on the five-year – or longer – plan, students who started college in the fall of 2007 will receive their degrees this spring.  It is hard to believe that it has been the same amount of time that the south sound real estate market has been in its down-cycle.

Whether the market is ready to graduate from this recession remains to be seen, but it does seem that the local market may be reaching an important psychological stage.

Over the past four months we have experienced more interest from tenants and buyers about jumping into the market.  There is a feeling that now is the time to invest, either in a building to own or a new lease with today’s more favorable terms. 

There are great lending programs out there to help buyers and tenants alike.  Loan programs with government participation, like Small Business Administration loans, or government guarantees like U.S. Department of Agriculture loans (yes, these are for more than farming), are helping banks spread risk and take on new loans. 

Still, all of the interest out there cannot help sell or lease overpriced listings.  The buyers and tenants are taking their time shopping.  They are educated about what true value is in the market.  The good news is they are jumping when they see it. 

There is a lot of space on the market.  The levels of supply we have on the market now are double, and in some cases nearly triple, what we expect in a balanced market.  Therefore, it is wise to stay ahead of the competition to attract the most attention from the buyers and tenants who are actively shopping.  Sellers and landlords who are staying out ahead of the market are finding success with these buyers.

Every market experiences cycles, so it is important to make decisions that make the best of today’s environment but that will also make sense when the market inevitably turns back up again.  For landlords, this may mean coming down in rent but staying short on lease terms.  It could also be that the term of the lease and rate are higher but other concessions, such as tenant improvements, are offered as incentives to the tenant.

For sellers, now may not be the time to sell.  Continuing to hold the property as an investment is certainly a choice many owners are making.  When considering this option, it is important to understand the appreciation rate needed to reach a particular return on investment.  Between the recessions in the early 1990’s and 2001, the annual appreciate rate for Thurston County was just below four percent (historically, the average has been around five percent).  Over the next five years appreciation rates are likely to underperform even those numbers. 

Given that possibility, some investors are seeing this as a time of opportunity – to replace an underperforming asset for another with better upside.

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