Are You Ready For Willamette Valley's Evolving Commercial Landscape?

INTRO

Welcome to the first edition of the First Commercial Real Estate team’s FCRE Market Insights.

Whether you're interested in the latest market trends, investment opportunities, transaction & client stories, or insights into the Willamette Valley’s commercial real estate landscape, we've got you covered.

We look forward to connecting with you, sharing our insights, and helping you navigate the dynamic world of commercial real estate. If you have any questions or need expert advice, our team is always here to assist.

What commercial real estate trends are you most interested in learning about in our upcoming editions of FCRE Market Insights?

Let us know by responding to this email.

We’ll see you every Tuesday morning.

Enjoy your holidays!

MARKET INSIGHTS
The Evolving Landscape of the Willamette Valley Real Estate Market
by Jennifer Martin

As you navigate the complexities of the market, it's crucial to understand the dynamics at play, especially in the context of fluctuating interest rates and market dynamics.

Today, let’s look at why interest rates are impacting deal velocity.

Here are 5 reasons why you should care:

1. Financing Costs: Interest rates directly affect the cost of borrowing money. Lower rates reduce the overall cost of purchasing a property while higher rates increase these costs, which obviously affect the profitability of an investment.

2. Investment Returns: The rate of interest has a significant impact on the return on investment (ROI). Higher borrowing costs reduce the net income from a property, negatively affecting its yield. Investors need to calculate these costs carefully to ensure that their investments remain viable.

3. Market Dynamics: Interest rates influence the overall health of the real estate market. Low rates generally stimulate market activity, leading to more buying and selling, while high rates can slow  transaction velocity. 

4. Property Valuation: The capitalization rate, a key metric in property valuation, is influenced by interest rates. Changes in interest rates directly affect property values, disrupting both buyers and sellers in the market.

5. Risk Management: Understanding interest rate trends helps manage risk. For instance, in a rising interest rate environment, locking in a fixed-rate mortgage can help protect against future rate increases.

How Interest Rates are Impacting Cash Flow and Property Values

Over the last three years, interest rates have adjusted upwards considerably.  Let’s illustrate this impact through the analysis of a hypothetical investment.

Using a $1,000,000 property where the investor obtained financing with 25% down with an adjustable rate mortgage in 2019.  At 4.5% interest and a 25 year amortization, the annual payments would be about $50,000.  

If we were to finance that same asset in 2023 at 8.0% interest, the annual payments would be $69,500.  

The investor would need income from the property to be almost $20,000 higher to obtain the same returns on the asset financed at 8% than the asset financed at 4.5%.  This changing cash flow is what causes the value of a property to go down when interest rates go up. 

That $20,000 change in cash flow due to the higher interest rate, assuming all other income and expenses of the asset are the same, negatively impacts the value of the asset by almost a quarter of a million dollars.

The higher interest rate environment leads to reduced deal velocity, as some investors are still hoping to sell their assets for the value they were when interest rates were lower. As financing becomes more expensive and less accessible, the market initially cools down until expectations adjust. Right now, some lenders are flat out not making commercial real estate loans and some investors still want too much for their properties in light of the interest rate shift, and both of those impact deal velocity.

What's Next: Opportunities and Predictions

In the face of the rise in interest rates, the commercial real estate community in the Willamette Valley must adapt strategically. Because some lenders are closed for business, traditional financing options are more limited. This situation calls for creative financing solutions, including exploring seller financing.

Moreover, with the changing landscape, opportunity may exist with properties that were financed in 2017-2019 timeframe with an adjustable rate mortgage and are facing an interest rate adjustment. As shown in the example, an adjustment on the interest rate could render the asset’s cash flow negative forcing the owner to sell if the cash flow no longer meets their lender’s requirements. Because of this, sophisticated investors are stockpiling cash to deploy when there's desperation in the market. 

We will likely see a shift towards cash-heavy transactions and/or distressed sales.

Finally, it's essential to understand that this is going to be some people's reality, but not everyone's. The community must prepare for diverse scenarios, advising clients with a keen eye on market dynamics and potential shifts in property values due to interest rate changes.

Have questions? Your First Commercial Real Estate Team is here.

Reply to this email with any questions and we’ll help however we can.

THE PLUG
Listing of the week

Jennifer Martin and Conrad Venti are excited to present a new listing in historic downtown Salem. The family behind Cooke’s Stationery has decided to sell their beloved building. This 1880 historic-contributing building offers the perfect opportunity for a mixed-use redevelopment project.

The building is located in the Riverfront Downtown Urban Renewal Area, which provides access to the Capital Improvement Grant Program and the Strategic Project Grant Program. These programs may assist with eligible redevelopment and construction costs.

Downtown Salem is experiencing a renaissance period, with numerous adaptive reuse and new construction developments completed in recent years, and several more planned or currently under construction. These include Koz on State, The Holman Hotel, Fork Forty, Whitlock’s, the former UGM block, the former Nordstrom building (now Rivenwood), and more.

Have questions? Click here to learn more.

COMMUNITY SPOTLIGHT
Family Building Blocks Gala of Trees

Friday December 1, 2023
Salem Convention Center
200 Commercial St. SE
Salem, OR 97301

Family Building Blocks and "Keeping Children Safe and Families Together." Each year, Gala of Trees promises elaborately decorated trees of all sizes featuring exclusive excursions, luxury items and accommodations, locally-focused opportunities, and much more. Helping raise over $3 million since it began in 1990, Gala of Trees has supported the efforts of many organizations serving children in need in Marion and Polk counties.

How can you help?
Tickets to the event are already sold out BUT you can still get involved by volunteering at the event.

Click here to get registered.