After months of uncertainty, the California, Oregon, and Washington real estate industry appears to have stabilized. That’s good news. The even better news is that the real estate sector is starting to improve, albeit slowly.
With employment losses moderating and industrial productivity showing renewed life, the economies of California, Oregon, and Washington appear to have hit the trough and should reflect modest steps toward recovery through 2010, says Jeffrey Munger, director of research at Kennedy Associates Real Estate Counsel, LP. “California, Oregon, and Washington have each been significantly [affected] by the recession,” he says. “However, it should be noted that these states have a high concentration of industries such as health care, information technology, and business and professional services that are anticipated to lead the nation in growth over the next few years. Moreover, after a period of decline, strengthening trade volumes with now-expanding Asian economies will serve to provide a lift to vital West Coast ports over the short term.”
Investment in public transportation—linked to market desire to live and work near transit—is another bright spot, says Karen B. Alschuler, urban design principal of the San Francisco office of Perkins + Will, an international architecture firm headquartered in Atlanta. “Continuing population growth and willingness to live at higher densities are two of the drivers,” she continues. “Long-term projects—and there are many of them in California key cities—will be finding their way through the thicket of entitlements with a healthy balance achievable between public benefit and development realities.”
Confidence is definitely returning to the California economy and to the state’s retail market, agrees Rick J . Caruso, president and CEO of Los Angeles–based Caruso Affiliated, a real estate firm that develops neighborhood and regional retail and mixed-use properties. “People have more confidence today than they have had in a long time,” he continues. “At our properties, attendance has increased substantially. Traffic is up 40 to 50 percent over last year at the Americana at Brand and the Grove. We have really strong properties in our portfolio and we are 99 percent leased. Retailers are being smarter about how they merchandise and are doing a lot of events, concerts, and programs to attract people.”
Caruso predicts moderate growth in California and the Pacific Northwest for the rest of the year. “Things will firm up and should remain [that way],” he continues. “Housing is starting to stabilize and prices are coming up a bit. Homes are selling. We’ll see more growth, more positive employment numbers. I believe that by the beginning of 2011, we’re going to get back in a normal range.”
With California on an increasingly solid path to recovery, the state now offers good opportunities for investors as well as companies looking to lease space or buy commercial properties, says Eric Kremer, a partner in the California office of Pillsbury Winthrop Shaw Pittman LLP, a New York– based law firm. “A year from now, people may well find they were too late for the party,” he continues. “There’s a saying that if you’re going to be in real estate, you have to have an optimistic viewpoint, and if you want to succeed, you need a realistic viewpoint. In California, I believe we are bumping along the bottom right now, and that presents good investment opportunities because it couldn’t get much worse—absent a change of course by banks holding defaulted real estate loans.”
The bright spot, says Kremer, is for firms that truly need new space. “They are looking for the first time at opportunities to not only lease space but also acquire properties,” he said. “Companies are able to get deals done at attractive prices. If you need space and have money to pay for it, it’s a great market now on the West Coast to acquire a building or two.”
Bradley T. Cox, senior managing director of the Los Angeles Trammell Crow office, points out that the Los Angeles markets remain stable. “L.A. County’s industrial market—still the number-one manufacturing center in the U .S.—has less than a 6 percent vacancy rate,” he says. “L.A.’s 200 millionsquare- foot [18.6 million-sq-m] office market has seen increased vacancy over the last two years, but it is in much better shape than in prior down cycles. Although the current office vacancy rate is 14 percent, vacancy was in excess of 18 percent at the beginning of the downturn in the previous two down cycles. As a result of that 4 percent swing, we anticipate that vacancies will drop much faster and rents will rebound much sooner than in prior cycles. Rent growth and vacancy declines should turn positive in late 2010 as job growth returns in early 2011.”
Many in the real estate industry believe the worst is over and that the future could be bright for the sector. Accordingly, planning for potential real estate projects continues, says Alschuler, noting that sustainability is becoming an integral part of California development from early concepts through design/engineering, construction, and operations. “A number of California communities have become savvy about the essential link between density, transit investment, and sustainability,” she continues. “At the 400-acre [162-ha] Treasure Island development in San Francisco Bay, where Perkins + Will has been working on plans and concept designs, support from environmental groups, informed communities, and key political leaders enabled a doubling of residential units at dramatically higher densities in order to assure them that the project would fulfill the promise of sustainability.”
Conditions in California will continue to improve, though they will not be as great [as they once were], says Al Cohen, president of Irvine, California–based Signature Realty Capital Corp., which provides debt and equity mostly in the single-family land development and homebuilding arenas. “This is still a well-diversified economy and a desirable place to live if you have a job,” he explains. “I keep hearing that things are getting better, that there is money out there, but very few people I know seem to be getting deals done, except for one land developer who has been able to get a few small projects completed.”
In Washington, says Bert Gregory, president and CEO of Mithun, a Seattle-based architecture firm, “there are some signs of the slumbering giant waking up to see if there is daylight. Urban infill workforce rental housing is one bright spot for strong equity players, along with student housing and planning around mixed-income affordable [housing]. The highest action is near existing or proposed fixed-rail transit lines. Medical office building and research labs continue construction in certain key locations, responding to continued health industry growth. Lower land and building value is creating opportunity for some players, and vacancy in institutional and commercial markets is allowing owners to create value by upgrading space through energy efficiencies.” Gregory adds that there is continued demand in the Evergreen State from software, technology companies, and emerging clean-tech firms as well as continued build-to-suit opportunities for private clients, nongovernmental organizations, and government clients via public/private partnership opportunities.
The Seattle region was late to the recession but may be primed to come out of it sooner than many other regions based on its strengths in exports, an educated workforce, a vibrant hightech base, a budding green-tech sector, and an enviable lifestyle. A leader in aerospace, the region has strong ports in Seattle and Tacoma as well as a strong and sizable military presence, adds Jeff Ballaine, vice president and loan officer at Seattlebased HomeStreet Capital, one of 25 licensed Fannie Mae Delegated Underwriting and Servicing lenders nationwide. “From a real estate perspective, most of us believe we are at or very near the bottom, but given the economic indicators primarily tied to employment, we will probably bounce along the bottom for a while before things get better,” Ballaine says. “Our hope is that we will begin to see improvement in our markets in the second half of 2010, positioning us for real growth beginning in 2011. Within our markets, moderately priced, multifamily housing in established neighborhoods close to major employment centers continues to perform well. Mixed-use projects on major transit routes within those same neighborhoods are also doing well. Transit-oriented projects seem to be the only real development projects getting serious consideration from regional municipalities and the few well-capitalized construction lenders currently active in our market.”
As in California, sustainability will continue to be a major factor in Washington real estate development, says Bob Ratliffe, executive vice president of portfolio management at Seattle’s Kennedy Associates Real E state Counsel, LP. “Tenants are demanding it because their boards are demanding it in the case of larger public companies and their employees are demanding it,” he continues. “They want a healthier workplace. Buildings that are not built with these factors in mind will be obsolete five years from now. We are seeing buildings lease up more quickly when they are LEED certified.”
Neighboring Oregon is also experiencing a real estate uptick, says Rudy Kadlub, CEO of Costa Pacific Homes of Wilsonville, Oregon, which developed Villebois, a transit-oriented development. “We’re like a pole vaulter. We keep springing up but keep knocking the bar off,” he says. “By the end of the year, we’d like to think we’re going to get a bit of an upswing; 2010 will be better than 2009, but only slightly better. We’re starting to rebuild consumer confidence, a little bit at a time.”
While Oregon, like most other areas, has experienced a slowdown, Kadlub continues, there has not been a major reduction in home values because the state’s restrictive land use laws keep supply low even in good times. “We’re seeing some improvement in the market,” he says. “Whereas three to four months ago nobody was offering, buying, or creating new lots, over the last 30 to 60 days builders have been acquiring finished lots from banks and the numbers are being reset in terms of finished lot prices to reflect a new market.”
In the Portland area, affordable rental and forsale residential development is showing signs of life, says Don Hanson, a principal at Otak, a locally based architecture and engineering firm specializing in transportation, growth management, and urban design. “Affordable rental housing with public subsidy has continued through the big downturn,” he says. “A number of these projects are in urban renewal areas developed by public agencies and housing authorities that partner with private developers.”
Otak is working on several urban neighborhood infill projects that target the low end of the market with no public subsidy. “They are all affordable wood-frame construction built at a scale that is compatible with the surrounding neighborhood context,” Hanson continues. “One, in north Portland near Cathedral Park, includes 49 units in several three- to four-story buildings. The one- and twobedroom units range from 800 [74 sq m] to 1,050 square feet [98 sq m], and all have one enclosed garage space,” he says. “The target sales price is $150,000 to $175,000. It’s a hip redevelopment neighborhood, and we think the project will be a success.”
The Beaver State’s current real estate situation presents a great opportunity for commercial users to reduce their occupancy costs, points out Ulysses Sherman, a partner in Portland-based Aspen Capital, a privately owned merchant bank. “Industrial leasing/sales activity has picked up in one of our projects from this time last year,” he says, “which is a good indicator if it’s representative of the market and if it continues.”
Aspen Capital sold Providence Health and Services–Oregon a 20-acre (8.1-ha) parcel in Vancouver, Washington, for $16.1 million for future development and arranged the sale of land in Prineville, Oregon, for social networking firm Facebook’s first company-owned data center. Construction has already begun on the 147,000-square-foot (13,657-sq-m) Facebook facility.
“There is also a lot of money looking for distressed opportunities, but not many sellers are being forced to sell, so not many transactions are getting done,” he says. “All the indicators are that there will someday be a flood of distressed opportunities, but by definition it won’t occur until the liquidity is dried out. The bottom line is it’s a tough time for existing portfolios, but a good time for users and new buyers/investors.”
Real estate investment trusts (REITs) are emerging again as a bright spot in the California, Oregon, and Washington real estate markets, says Lewis G. Feldman, a partner in the Los Angeles office of law firm Goodwin Procter. “Purchases by REITs and sales of troubled REIT assets will also accelerate,” he predicts. “An example of this trend is what I call the ‘Brawl of the Malls’—Simon Properties’ hostile takeover attempt of General Growth Properties. M &A [merger-and-acquisition] transactions like this underscore that those cash-rich REITs will seek to find pleasure in cash-poor competitors’ pain.”
Private REITs going public is another trend that will likely develop over the next 12 to 18 months, says Feldman, as public appetite for fixed-income and inflation- protected securities increases due to demographic factors such as the baby boomer phenomenon and the need for income over capital appreciation. “Additionally, urban development will advance as higher energy prices, regulatory requirements calling for the elimination of greenhouse gases, and greater emphasis on the jobs-to-housing balance fuel inner-city projects,” he notes.
While the real estate industry in California, Washington, and Oregon may have bottomed out, the mood remains cautious. “Without a growing economy, real estate fundamentals for all asset classes will remain stagnant or deteriorate further,” says Munger. “It is anticipated that fundamentals will continue to weaken slightly before stabilizing in late 2010 and early 2011. As the economies of each state slowly improve and job growth returns, real estate markets will follow accordingly.”
