Jan 20, 2010

The Cryogenic Economy

---

By: Jim West

Strange things have been happening over the last eight to twelve weeks here in Clark County.   Commercial Real Estate sales transactions!   The concept of buyers and sellers agreeing on a price and executing a transaction had been pretty rare since the "Fall of 2008".   You remember, ... Right in the middle of the presidential election in 2008 we had  a massive seize up in the  financial  system of our economy. In fact eventually it became completly  frozen like some kind  North American Ice Age glacier, or Ted Williams  head at the  Alcorn Life Extension Foundation cryonics facility. 

 

This kicked off the past 15 months of what I call the Cryogenic Economy.  To give credit ( perhaps the wrong word just yet) where creativity is due, I stole that phrase from my friend Randy Sheel of  Anctici.biz.  Randy  is a leader among those who study the future, particularly in relation to health care for his company Ft. Vancouver Convalescent. He coined that phrase - not only describing the economic situation  , but how many people have responded to it. This was evidenced by  pulling back on plans and  delaying personal and business decisions such as marriage, education, children, investing  and many others.

 

In addition to individuals "freezing" banks simply stopped lending money. Building and construction projects, &  investment real estate felt the direct impact, grinding many industries to a halt.  

 

However the 4^th quarter of 2009, has shown some signs of a thaw, or at least of warming (no not global) activity that could be evidence of a thaw.  Here is a list of several transactions, and it is not meant to be comprehensive:

 

       Kmart - Andresen Blvd                                              3.0 million

      1^st Independent Bank Building - Vancouver Mall         1.1 million

      Parker House restaurant - Washougal                           1.7 million

      205 Commerce Center - 112th corridor                        8.3 million

      GI Joes on Mill Plain  - Cascade Park                           5.0 million

      Koin Center  - Downtown Portland                           50 plus million

       18^th Street Business Park -Central Vancouver             2.12 million

 

 

Jeffery Sackett, a principal with Capstone Partners a major Portland real estate investment firm  told the Oregonian "Any trade is a good thing because it starts to establish value".   This was in response to the KOIN Center sale finalized in late December, and purchased by American Pacific International Capital.    

 
 

How does this help us?   As Sackett says all trades help establish some kind of value, a market rate buyers are willing to pay where they believe they can make profitable use of the property.  This  has been a significant piece of our problem the past two years.   What is a real value?   With few deals in todays market appraisers have limited data to operate on, and what data on which to operate. What data they have shows significant downward trends.  

 

It is vital for future lending that banks are able to determine a true value.   Banks have zero room for error in determining  loan to value ratios.   It will take two things to get banks to lend again, 1) Knowing a realistic market value so they can get the Loan to Value ratios correct, and 2) Getting the problem assets off their book.  A regional banker shared with me it takes ten times the amount of time to process a workout or troubled asset property as it does to  write a new deal.   

 

All of the above transactions help that process and there will be more.  The majority of these deals used all cash or cash and some component of owner financing.  Capital markets, the life blood of real estate are still stressed.  Lending standards  are more strict, government liquidations of local and regional banks adds  more slush and mess to the market place. However, cash and capital infusions will continue to help gradually warm the market place over this next year.  

 

In addition after a full year operating under the cryogenic environment business model, many companies are still doing well.  They will be prized potential customers for local lenders.   This outlook was affirmed by the January 10th  Columbian article which suggested Clark County bankers expect to only slowly increase lending over the year, and that a focus of that lending will be commercial real estate and commercial and industrial small business loans. 

 

Our conclusion is that as we move from the cryogenic to the slushy messy stage, there will be great opportunities and values for consideration by those ready for transition from leasing to owning their commercial space.
 

 

 
Your Future : Own It