By Jonathan Bach – Staff Reporter, Portland Business Journal
The threat of another economic downturn, paired with rising mortgage rates, has implications for commercial mortgage lending in Portland. Blake Hering, Principal, offers his insights.
Portland felt another jolt when it hit the bottom of a recent ranking for office building sales while Seattle sat at the summit. In some ways, it’s a continuation of the narrative that’s beleaguered the Rose City for much of the past two years, though other factors are at play, according to Blake Hering Jr., a principal at mortgage banking ﬁrm Gantry’s Portland oﬃce. The Business Journal spoke with Hering about Seattle’s dominance and how the threat of another economic downturn, paired with rising mortgage rates, will aﬀect the commercial mortgage lending market in the months ahead.
Here are excerpts from the conversation, lightly edited for brevity and clarity.
How the Fed raising interest rates and a potential recession could aﬀect Portland commercial mortgage banking?
When you have low interest rates, money ﬂows more quickly and readily into the market. So as you start raising interest rates, that ﬂow of money slows down. So generally speaking, yes, we are going to see a slowdown in acquisitions and business transactions. There’s no doubt as these rates rise as quickly and dramatically as they have, it has at least a temporary pause eﬀect on the market. People have to step back and absorb a correction that’s this steep. (Commercial) rates have eﬀectively doubled in the last 12 to 18 months. Spring of last year, we were locking in long-term ﬁxed rates in the 3% or less range. And today, you’d be hard-pressed to ﬁnd a longer-term ﬁxed-rate loan below 4.5, and typically more like 5 or above. So, that’s a pretty dramatic eﬀect. The diﬀerence between residential and commercial is that you’re pricing an income stream in commercial, and therefore, you’re aﬀecting the investor’s rate of return when you price their debt that much higher that fast.
When the eﬀect of mortgage or interest rate hikes could be felt?
We’re seeing them, as an intermediary, right away. So we see them immediately. Bigger picture, we saw a trend that had started pre-Covid, where investor capital was ﬂowing more readily within the commercial space to apartments and industrial, with a little bit more caution towards retail, oﬃce and hotel. That accelerated quite a bit during Covid, and now again, with the rate hike that continues to accelerate that same trend. So while investor demand remains modestly strong for both apartments and industrial, it’s continued to fall oﬀ, certainly for oﬃce, certainly for hotel and to some extent, retail, which is a little bit more nuanced, but signiﬁcantly in downtown oﬃce.
Why Seattle is more popular than Portland for some investors?
A lot of the lenders we deal with are not in the local market. So we’re bringing capital to these markets in the Paciﬁc Northwest. Seattle (is) viewed more favorably than Portland, in part because they have a handful of really large, stable employers, really signiﬁcant sized companies Portland does not have. So while historically, at good times, it can be a beneﬁt for Portland that we have a really diversiﬁed economy, and we don’t have a lot of huge players, in times like these, that can underscore some of the concerns that either an investor or a lender can have about a market’s durability. And then, we have signiﬁcant headline risks. Seattle had it to some extent, but maybe a little bit less than ours, in terms of the political environment, and the protests, and that has a signiﬁcant impact on people’s perception of how Portland is viewed as an investment market.
Mortgage lending for the rest of 2022
The activity that we will see is more apt to be focused on suburban, multifamily and industrial than any other asset type. On a selective basis, again, suburban retail is still viewed favorably, and then the likelihood of any signiﬁcant activity in downtown oﬃce for any kind of ﬁnancing is pretty remote. And certainly, again, hotels are not a property type we touch a lot. Those are probably not going to be particularly active in our space.
Investing in self storage
The other product that has surfaced is self storage. And that has remained fairly attractive to lenders. And I could see activity continuing to be modest through the rest of the year. But modest would be the key word for almost any lending through the second half of this year. It’s going to be modest volume. A lot of people (are) of course downsizing. As you see the escalation of values for homes and the increase in rent for apartments, people are choosing smaller places to live. And yet, they still have a lot of stuﬀ. So that stuﬀ goes into a self storage facility. And that’s been a growing commercial property type, both in terms of investor demand, tenant demand and lender demand — all three.