Skagit commercial real estate market shows welcome strength
Lenders prefer multi-family, assisted living facilities on rising demand

by R.W. Clever

 

 

The commercial real estate market in Skagit County has remained stable while in most parts of the rest of the country, including the Seattle Metro area, it has been slogging through a prolonged slump.

In the county, real estate brokers, builders, financial institutions and others engaging in building for the commercial and multi-family market say the demand has remained steady for most sectors and very strong for apartments and assisted living facilities for the elderly.

“There’s plenty of work to do,” said Jim Koetje, an agent with Windermere’s Mount Vernon office. “I’d say the market is strong, in both leasing and sales. The commercial investment in the valley is strong. People are looking to invest in real estate after the disastrous stock market.”

Clay Learned, head of Northwest Properties, of Mount Vernon, believes that the commercial real estate industry “is still vibrant, if in a state of flux. There is a perception of a good quality of life here” that is attracting interest from outside.

Josh Linvog, of Washington National, a mortgage lender, shares that view and doesn’t see the danger of overbuilding anytime soon.

“Right now, we can’t even build up to what the market will bear,” he said.

Linvog is in the process of financing a small strip mall that will go up along Riverside Drive in Mount Vernon. It will most likely have parking on the first level with shops and offices on the upper level. He sees a growing market for small strip malls and business parks, offering office and retail space of about 900 square feet and 30 feet of storefront.

“They’ll lease at about $1,000 to $1,200 a month,” he said. “There are a lot of small businesses in the valley who need that kind of space with a relatively low rent.

As Skagit County’s commercial real estate sector managed to post some modest gains in the past few years, the national market has been deeply distressed and is only recently showing signs of rebound.

The increase in office vacancy rates is still high, but is beginning to slow. Spending on construction of business buildings posted small gains in the fourth quarter of 2002, but fell again in the first quarter of this year.

Business has been holding on to its cash, even after the end of the Iraq war. Economists are not sure whether that caution is because of concerns over terrorism and the war or general worries about the economy. The cities that were hardest hit were those with a heavy concentration of technology companies – Seattle, Boston, San Francisco Bay area, and Austin, Texas.

“We’re probably into what is now about the 2-1/2 year mark of a fairly rapidly and steeply declining commercial real estate market,” said Mark Yeager, chief investment officer for the Gale Co.

“Once people could no longer project where they thought their business should be going, where they should spend their money, the corporate spigot effectively turned off, and that was the death march for the corporate real estate industry,” he said.

Skagit County, whose economic base is decidedly not in technology, has fared better than many of the state’s larger population centers.

Learned noted that five years ago high tech was touted as the future of Skagit County.

“Well, tech is great, but it does not drive the economy,” he said, with a nod toward Mount Vernon’s E-Tech campus on Continental Place. The building was to house what its owners and city officials hoped would be a burgeoning high tech industry. But the dot.com bubble burst before the building could be fully rented.

Skagit County recently purchased the building with a plan to consolidate the offices of some county agencies.

Many of the area’s builders have kept busy building multi-family housing and assisted living facilities, which, Windermere’s Koetje points out, banks have found it easy to finance because of the strong underlying strength in that market.

“Banks are not afraid of multi-family at all,” he said. “There are some very favorable terms available.”

Sally Gordon, senior credit officer at Moody’s Investors Service, recently warned that some cities still experiencing high vacancy rates for office space will still have some tough times ahead until the demand for office space catches up with supply.

In Seattle, office leasing has dropped considerably over the past few years, prompting building owners to slash rents to bargain basement rates.

For Skagit County and much of the rest of the state, it was residential housing that was the hot sector, thanks to 40-year lows in interest rates. So strong has been the contribution of housing to U.S. economic growth that in the first quarter, fully a third of the nation’s limp 1.6 percent expansion came from residential fixed investment – a sector that makes up less than five percent of the nation’s output.

The U.S. Department of Commerce reported that nationwide industrial construction spending has fallen 66 percent from a peak in August of 1998, while office construction spending is down some 45 percent from its height in December of 2000.

Vacancy rates for the hardest-hit segment – office space – remain fairly high at about 15 percent, said Moody’s Gordon, who produces a quarterly evaluation of U.S. property markets. But in some parts of the country that situation has begun to turn around.

“On a market-specific basis, the office sector shows some improvement,” she said, in a report last month. At the same time, the high vacancy rate means it will be at least a year before landlords gain the upper hand in setting rents.

Lingvog, among others, sees traffic problems along Riverside Drive and Burlington Boulevard as a potential obstacle to the area’s continued growth.

“Skagit Valley is really 20 years behind in their traffic areas – much like Everett was 40 years ago,” he said. “The Burlington City Council didn’t really anticipate the growth. They saw it as a sleepy farm community.”

Still, he said, “Because of the growth we’re experiencing it’s going to mean a lot to local contractors.”

The supply of financing remains fairly steady, particularly on projects that involve residential and multi-family housing. And for developers who have trouble finding money at the bank, there is a secondary market with entrepreneurs like Navor Tercero, a young loan broker specializing in commercial construction and real estate.

“Companies with good projects that for whatever reason the banks won’t finance come to me for financing,” he said. “There’s a lot of great programs out there for apartments and assisted living facilities – the two demographics. Assisted living is attractive to financiers, along with apartment buildings. With property values heading up, many people can’t afford to buy a home, so they must rent.”

Wayne Foote, of Gustafson & Associates, a leading real estate appraisal firm in both Whatcom and Skagit counties, said he hasn’t seen a noticeable dropoff in three to four years.

“Ever since the wild days of the stock market, it hasn’t tapered off” he said. “A lot of people who made money in the market began pulling it out to put somewhere where it would be safe.”