Stricter underwriting by lenders is the new norm as the calendar year pushes into 2008. For about the past two years, lenders were granting commercial real estate loans primarily on the basis of the individual's stated income; e.g., ability to repay the loan based on the borrower's apparent ability to pay.
For the past two years, typical, historical lending criteria such as comparable sales and leases (market) and the ratio of net operating income to purchase price (capitalization rates) were secondary consideration to stated income.
So far, this has not created the types of problems evidenced in the current residential subprime lending scene. However, if businesses begin to lose significant sales and resultant profits, commercial properties may come on the market as borrowers' ability to pay are stretched. If the underlying values of these properties are less than what the lenders accepted by relying heavily on borrowers' stated income instead of traditional market and income/cap rate criteria, and borrowers can no longer meet their loan obligations, some commercial properties may be forced on the market at lower prices.
On balance, commercial property values in the Portland metro area seem to be holding up well. But the first signs of softening are appearing, with Landlords beginning to offer broker incentives and more concessions such as free rent to tenants. Sales prices have leveled off, after shooting up significantly the past two years.
For a more detailed look at the current Portland Office, Industrial, and Retail markets, please click on the links below.
