South Sound Commercial Real Estate Update

by Coldwell Banker Evergreen Olympic Realty, Inc. on March 17, 2011

Looking back over 2010 we see a common theme through much of the commercial real estate landscape – affordability. Corporate profits are solid and larger companies have record amounts of cash on hand. At the end of the year, borrowing by small businesses jumped to the highest level in more than two years. You can bet with banks being more selective in lending, borrowing was for the solid growth prospects rather than simple survival needs. The presence of government programs to help banks shoulder the risk provided further impetus to help folks buy their own space.

While banks are getting healthier, we expect lending on purely investment properties will remain somewhat constricted. However, investors with cash or enough solid collateral will look for buying opportunities with bank-owned properties that are still emerging in our marketplace.

On the leasing side, smart businesses continue to look at this down cycle as the chance to invest in their future. Right-sizing, finding a more appropriate location, or revamping current space was occurring a lot last year.

For their part, building owners looking to ensure cash flows and make the best possible returns today were working to redefine what a win-win means today. In many cases this meant lower rent but a shorter term at that rate. In other situations, different concessions were made to keep rents up and a longer length of lease.

Going forward through 2011 there is quite a mix of positive and still challenging news. Keeping a weather eye on all indicators will help reveal where things are really headed. Trailing indicators, like jobs, are certainly important to the real estate markets in the near term, but the leading indicators are more important for longer range planning. Investments will start to be made as we progress through the year, but they are likely to come at a slower pace than prior post-recession recoveries. Interest rates continue to be favorable. Surveys of traders show that short-term rates are expected to remain flat through 2011 before finally trending up in the first half of 2012. Longer-term rates are bouncing up and down, as inflation and the lagging recovery tug and pull. Businesses planning to grow will look to lock-in with today’s lower rates.

On the challenging side, local unemployment is the great unknown. How far the Legislature and Governor cut the budget and jobs remains to be seen. Our market’s unemployment rate has come a long way off the high of 9% set just last February. Yet at 7.6% we still have a ways to go.

Another X factor in the market is the unknown flow of foreclosures still on the horizon. The residential market has seen a steady flow since mid-2008. The commercial side has only recently seen the volume pick up. We expect more properties to come back to lenders before the economic recovery takes firm hold. Prices, as ever, will be impacted by this extra supply.

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