Market Report

Dear Clients and Friends,

Let's talk about the Port. There have been rumblings about not having the Port, and I myself have wondered, so I decided to explore a little deeper. I want to make sure that folks make judgments based on all the information they need. First and foremost, we need to understand what the issues really are, and what they are not.

What is the Port’s mission?

To spur economic development in Thurston County. A public (vs. private) Port can, for example (a) create a larger more organized infrastructure than a private company, (b) provide recreational infrastructure for the entire community (Farmers Market, waterfront parks), (c) undertake huge projects such as the Cascade Pole cleanup, new logistic/distribution center (d) operate in a regional context to solve our current transportation problems (read about the new logistics center proposals).

What is its history?

In 1922, voters of Thurston County created the Port as a public taxing district. At the time, it was only the marine terminal. At the beginning, it primarily handled wood products, canned goods and produce, military cargoes (in WWII). It purchased the airport site in 1963, along with 700 adjoining acres. It now houses more than 170 private aircraft, and 29 businesses operate from there.

By the 1990's, the Port was languishing so re-invented itself. A new Comprehensive Plan was drawn up, investments were made in equipment and facilities for cargo handling at the Marine Terminal, upgrades were made to the airport, it built Swantown Boatworks and Marina and formed its Property Development department. It pursued new marketing strategies, which for the most part have seemed to help diversify its business. It applied for and received the Foreign Trade Zone designation, which serves import/export activities in 4 counties. The FTZ allows goods coming and going overseas to get in certifiable condition in terms of customs duties or compliance, e.g labeling issues, quality control, so that cargo doesn’t get bogged down. Distributors can consolidate entries to save money. The FTZ also provides a very high secure environment, so a bonus after 9/11.

So, in 2004 the Port and its tenants generated $429 million (not available for 2005, but probably lower) in direct business revenue (business revenues generated by the Port and its tenants in Washington State), $14.8 million in state and local taxes, and about 465 direct jobs (the Port itself employs about 45 people). The Port generated about $500,000.00 each to Olympia and Tumwater from leasehold, B & O taxes, and sales and use taxes. I suppose that is a quid pro quo for having Port land off their tax rolls. If so, then Tumwater is getting a pretty good deal (see chart #2 below). Nothing for Lacey or the rest of the County which contribute 15% and 57% respectively. If South County proposals materialize, that should provide a good boost for them. Lacey is the beneficiary of a couple of FTZ activated trade sites, and a couple of Industrial Revenue Bond sites. Perhaps the Port might begin looking at Lacey for some business investments.

The 60 acre Marine Terminal has 3 deepwater berths. It employs longshoremen that move cargoes (aluminum from Russia, garnet from Australia (for abrasives and cutting, not jewels), logs to Japan, military equipment to war zones). It handled approx. 325,000 metric tons of cargo in 2004, 63% of that was logs. 2005 fell to 115,000 metric tons (reduced log shipments). It generated $2.7 million in 2005 (down from $3.5m in ’04).

Rail car capacity also is expanding.

Land lease revenues generated $1.6 million in 2005. The Port owns about 1750 acres in Olympia and Tumwater.

Swantown Marina and Boatworks. The marina accommodates more than 575 vessels moored there, plus guests. Its income was $2.1 million in 2005. Twenty-six businesses operate at the Marina and Boatworks, and roughly 130 jobs have been generated there.

The airport generated $566,316.in 2005, and estimates of 166 jobs were generated by airport activities and its tenants.

Chart #1

What do our taxes pay for?

Assessed value for Thurston County property is almost $20 billion. We pay $241M in property taxes. The Port gets 1.7% of that, so $4M. Oly will contribute about $872M, Lacey $600M, Tumwater $300M. Those three add up to 43% of the taxes. The rest of the county picks up 57%.

Chart #2

None of the $4M goes for daily operations and maintenance anymore. The Port has become self-sufficient. The $4M, along with Port’s profits ($825,000. in '04, only $27,000 in '05 because of log cargo reduction, big insurance and legal fees), go into the Port’s Capital Program, funding for infrastructure, land acquisition, environmental cleanups, etc. It is important to note that the Port has a lot of fixed costs, so decreases in cargo at the Marine Terminal have a very direct effect on profits. Probably the biggest variable is logs. If it is a good log year, the Port generates lots of revenue.

Does the Port need to have trucks?

The answer to this is "gimme a break".

So what's going on here?

The fact that bogus claims and suits are able to hold up qualified prospective Port tenants shows how issues can get political in a hurry. The issue is not incomplete environmental reviews. The issue is Corporate America. If the new tenant were a logger from the Westside instead of Weyerhaeuser, my bet is that we wouldn't be having this conversation, and I would have picked another topic for this newsletter!

First, Port directors should know by now that they need to operate in a transparent and professional way, and they need to pay attention to protocols. Secondly, we as a community should welcome good Port tenants, big or small, instead of trying to run them off. Weyerhaeuser is a good corporate citizen, a "green" company that manages its forests in a certified sustainable way, and a company that is grounded in our State. I will add that, like other large corporations and unlike small companies it has a Foundation that contributes big bucks to local causes in the communities it serves. One big deficit in this State Capital is the lack of large corporate donors for local causes. I'd say we shot ourselves in the foot again. Small companies shoulder a disproportionate amount of the donation business. It would be nice to have some help.

In summary

I believe that, after weighing things, we should continue to provide the Port with the capital it needs to build its assets. Ten or 15 years isn't really enough for those new strategies to kick in economically. And in these days of globalization and the economic benefits of critical mass, working as a regional entity is important. In addition, we must realize that the Port doesn’t operate entirely as a business. It is really in the business of generating services so that others can generate jobs and revenue for the county. If we were to “get rid of” the Port, or the Marine Terminal, or whatever people are wanting to get rid of, we will never get the benefit of the investments that were made in order to have a viable Port. Just when the Port is beginning to become the engine of opportunity that it was meant to be, some of our citizens want to cut it off. I guess they want a park.

All that being said, I have a big beef with the Port: The Port should not turn over its valuable waterfront real estate to the City of Olympia for its offices. I think getting a tax-paying entity would be a heck of lot better use of the resource and better return to the taxpayer.

Update on the Public Facilities District.

Well, hooray for us all. That is behind us, with Lacey deservedly getting the lion’s share of the money. Now it can proceed with the sports complex, although time has probably added a couple million dollars to the cost.

Real Estate stuff

Apartment vacancies are still low at under 4% at PLI. That is still a very strong market.

Office vacancies in Thurston County are huge, as mentioned above, bucking the national trend. The State has vacated so much space that it can't possibly be backfilled in the near future.

Retail vacancies are falling. The increase in our population, coupled with the economic vitality of the area has provided the retailer with confidence.

Warehouses are in short supply. That's very good, except for the trucks, of course.

Cap rates

Cap rates are moderating, as you might expect with rising interest rates. However, in 2005, the median price per square foot of retail properties rose 16% to $230. psf. And it is still rising in 2006, 7% as of June. Restaurant investors are paying 20% more, $260.psf. Cap rates declined again in this sector to 6.2%. Other cap rates are coming in at 6.7% to 6.9% for commercial properties.

Don’t pay too much!

Things have been pretty crazy these last few years. There is a good chance that cap rates will be higher than they are today (prices lower), which means that gains must come either from buying in a location that is right in the path of progress, or from increases in Net Operating Income (NOI) rather than from market appreciation. That means that a project’s financial and economic sense should be close to the top of the criteria list for buying. Real estate is not risk free, so an investor should expect a return higher than Treasuries. Ten year Treasuries are about 5% now, so a 2% risk premium would indicate a return of at least 7%. Average cap rates over time have ranged from 6.3% to 9.9%, with an average of 7.9%. If an investor buys today, he/she should project a higher cap rate than is common today. Mortgage rates are ranging from 90 to 140 basis points over 10 year Treasuries.

In some places I read that foreclosures seem to finally be materializing, and other places I read that delinquencies are still 'extraordinarily low', so I can't tell, other than things seem OK around here. However, sooner or later, irresponsible lending will catch up with those who shouldn't have borrowed and spent. There is a huge difference between borrowing for investment and borrowing for consumption. The former builds wealth, the latter dissipates the assets, just as surely as chickens come home to roost.

Our economy in general

So far, so good. Retail sales tax revenues are way high everywhere except Tumwater, which shows a negative. Unemployment steady at 5.1%, more jobs being created in many sectors, Boeing in particular, but retail, hospitality and information services also strong. I think the old saying still holds true: As goes Boeing, so goes the State. Boeing is selling airplanes.

I'd like to welcome some new folks at Prime: Nicole Culpepper, Front Office. Linda Terry, commercial agent. Connie Kuenzel, JulieLaRocque and Tammy Bailey, seasoned property managers.

Priscilla S. Terry, CCIM, Broker, ed.