Positive Signs on Road to Real Estate Recovery

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Experts Strike Optimistic Tone Battered Market Has Turned Corner

The general drumbeat emanating from the annual Bend Chamber-hosted Real Estate Forecast Breakfast echoed that the market is recovering and “ingredients are falling in to place” for a turnaround – but it will likely be a long slow haul up from the depths.

National economist John Mitchell, one of the keynote speakers – along with Tom Greene, principal broker of Re/Max Key Properties and Brian Fratzke, Principal of Fratzke Commercial Real Estate – at the 2011 conference attended by over 450 guests thronging The Riverhouse Convention Center, said: “We are digging out of a deep hole but we are moving in the right direction.”

He observed that a number of key indicators pointed to a growing national economy but residential real estate continued to “bump along the bottom” as we halt the slide and enter what appears to be a period of slower growth.

Mitchell commented that Bend was a ‘poster child’ for real estate market fluctuations, having plummeted from the highest reported appreciation in the country to the greatest depreciation, with residential construction activity dropping to barely a quarter of its 2006 peak.

The region’s wild ride was triggered by a confluence of forces, including an easing of monetary policy in terms of interest rates, “loose” underwriting and a drive to encourage home ownership. “But when you open the floodgates, you cannot tell the water where to go,” said Mitchell, who also referenced a regulatory and political failure to recognize the situation, or do anything about it.

He also cited the failure of risk management practices, and an “originate to sell” model for home loans where mortgages were bundled and sold off to the secondary market as quickly as possible, with different incentives, as distinct to prior times in which “when institutions made loans, they held on to them”.

After a 90 percent decline in residential permit activity compared to 2005 and housing prices in free fall, the region was troughing along the floor and poised for an upturn.

Nationally, the recession was technically over in June 2009, declared Mitchell, and output thereafter was emerging into new, positive territory.

Employment data was mixed, though with underlying positive trends, but there was now also a pattern of other rising forecasts, including a positive outlook for Gross Domestic Product growth (estimated at 3-3.5 percent for 2011) and consumer spending, while inflation remained relatively in check (estimated to hit 1.5-2 percent in 2011), notwithstanding so-called “Black Swan” events – low probability, outlying instances that have major significance – such as potentially the current unrest in the Middle East and the implications for oil prices, which could impact a fragile nascent recovery.

Regarding the government, the age-old spending and role debate had returned to the forefront, which could be seen as a welcome development, along with monetary and regulatory policy changes and a looming “moment of truth” in terms of fiscal responsibility.

 
Potential obstacles to recovery included real estate “leftovers”, or underwater properties carrying negative equity, the reigning in of consumer spending as many householders attempt to repair their balance sheets and reduce debt service burdens, and the fiscal problems faced at the state and local level.

 
Other potential impediments ranged from an anticipated more restrictive lending environment, to the threat of an oil price leap (see Middle East unrest volatility mentioned earlier) and declining tax revenues.

Mitchell also referenced one school of thought regarding the aftermath of financial crises that posited in 10 of 15 cases employment did not return to pre-crisis levels 10 years after the “event”, while median house prices remained 15-20 percent off their peak within an 11-year period.

Unemployment levels appear to have also bottomed out, with 42 states showing year-over-year job growth by December 2010, as opposed to the same month in 2009 when none of the 50 states ranked by job growth reported any positive change from the previous 12 months. One a micro level, Bend’s employment figures were 16 percent down from the peak of 2007, especially in the construction and manufacturing sectors.

Mitchell concluded by leaving the audience with several things to consider – among them that the forces that helped drive Deschutes County’s growth, including enviable natural amenities, were still here, and that evidence was rising of a growing national economy, though he cautioned that recoveries from financial crises are inevitably different in each circumstance.

Following the sobering fallout from the biggest financial implosion since the Second World War, which has been dubbed the “Great Recession,” he said: “We are not coming back to the same place. A generation will think differently.

“Think how the Great Depression affected our grandparents and great-grandparents’ psychology for the rest of their lives.
“This generation will likely be more cautious and less willing and able to suck equity out of their home, and more apt to think of a house not as an ‘ATM’ but as a place to live.”

He added that real estate’s correction, as painful as it is to many, means there is a new level of affordability, though amid an environment of minimal new construction, changed expectations and continuing falling prices as inventories are absorbed.
Mitchell concluded: “The ingredients are falling in place for a recovery – it is slow, but the numbers are moving in the right direction.

“The real estate recovery is, I believe, getting underway, and when we gather here next year I suspect the forecast will be much better.”

RESIDENTIAL REAL ESTATE
Local real estate veteran Tom Greene struck an upbeat tone in emphasizing an optimistic, positive mindset and remarked that the fact that there was a sell-out crowd at this year’s chamber conference bolstered that opinion.

He cited evidence that sales and transaction volume levels were up from their low point of 2008, even as prices remained flat, and that Deschutes County’s population grew by some 1800 new residents last year.

Greene said that the median home sale price in the county was approximately $190,000 in 2010, though he preferred to highlight the average sales price of around $250,000 for the same year.

Median income was around $44,300, which, given current underwriting guidelines, equated to purchasing power of $160,000, with a number of properties currently available in that range – including 171 in Bend under $150,000 and 700 in Deschutes County below the same level.

Reiterating the positive vibe, Greene said opportunities to own were now more abundant, with more lower priced homes available, as well as historically low financing rates and specialized programs.

More streamlined systems were also in place to oil the wheels of the real estate market, including a more full-time, professional brokerage community with higher educational requirements, and financial institutions employing policies and strategies designed to move bank-owned product efficiently.

Shorter marketing periods were exemplified by, for example, Bend having just 3.5 months worth of inventory in December 2010 compared to 24 months during the supply peak of June 2008.

Tempting prices were also attracting investors to the market – whether that be in the category of rentals, multi-family properties, or land and development property – while a variety of purchasers were emerging – from first-time homebuyers to retirees, as well as the relative return of the second home or vacation home buyer.

“People who have been watching our market and who have always wanted to move to Bend are seeing the lower prices and are finally able to make the move,” said Greene.

COMMERCIAL REAL ESTATE
In his address to the conference, Brian Fratzke focused on the commercial real estate sector, saying investors should expect a return to “realistic” growth rates through increasing value over time with a sound financial approach and tangible equity, as opposed to the “false appreciation” represented by the rampant speculation of 2005-06.

He also accentuated the positive, advocating that we should leverage our region’s assets and promote its incredible natural resources, community support and great environment in which to raise a family.

The area continues to be attractive to new residents and businesses, he said, adding that there were relatively more affordable opportunities and “the commercial real estate market is fuelled by tenants”.

To illuminate the point, he introduced a video featuring three business owners he has worked with – Dr. Jeff Johnson of Bend Dental Group, Pratt Rather of Noble Brewing Company and Dan Hobin of G5 Marketing Solutions – commenting on why they chose to locate in the Central Oregon area. Each alluded to the quality of life components, the cohesiveness of the community, educational opportunities and talent of the workforce.

Dr. Johnson also utilized local expertise in the construction of his practice, while Noble Brewing has leased a 20,000 square foot facility in expectation of rapid growth and G5 is a hi-tech trailblazer, now occupying 25,000 sq ft of commercial space, having mushroomed from two to 109 employees.

Fratzke made a number of predictions for Central Oregon moving forward, including:
• the continuation of small business diversification, though with the associated need for support and nurturing;
• year-over-year positive absorption (i.e. more space leased than vacated) of
office space;

• year-over-year positive absorption in the retail sector (with a limited supply in high-demand retail hub areas);
• continued popularity of multi-family property as an investment vehicle, especially in light of ability to finance, increasing occupancy levels and upward pressure on rents;

• encouraging leasing activity in smaller industrial units, though plentiful larger spaces remain available;

• healthy interest in existing buildings while prices remain attractive, with minimal new development of vacant land expected in 2011, though that trend could pick up into 2012;

• a return to financing parameters “the way it used to be” requiring substantial down payment and the need to meet more stringent debt coverage ratio criteria in terms of the relative cushion between building income and debt service outgoings;

• energy-efficient, “green”, or LEED-certified (Leadership in Energy and Environmental Design) properties will continue to
be in demand.

Pointing to successes in 2011, he highlighted the continued growth of existing established businesses, with Bend Memorial Clinic, PV Powered and Global Strategies all having leased additional space in the first quarter.

In addition, the Century Center – a mixed-use re-development of former mill buildings off Bend’s Century Drive – is set to bring another 9,000 square foot on stream, Oregon State University-Cascades Campus is looking at expanded facilities to house graduate programs, and the Department of Veterans Affairs is seeking a 25,000 square foot building for consolidation of local operations.

Fratzke said: “I would recommend that building owners, tenant and real estate professionals continue to educate themselves on the market.

“Landlords would be well-advised to check in on their tenants to make sure their needs are addressed in the current environment, while tenants should be aware of their lease parameters and businesses looking to potentially relocate to our region should take advantage of the plentiful local resources to assist in that direction.

“The brokerage community has opportunities to be better informed, including through resources and data offered by bodies such as the Certified Commercial Investment Member Institute – and we should all remember what our area has to offer.”

Info:  Brian Fratzke, www.fratzkecommercial.com,541-306-4948; Tom Greene, www.keyproperties.oregon.remax.com, 541-419-0021; John Mitchell, M & H Economic Consultants, 503-697-8936.

 

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