Market Report

Dear Clients and Friends,

Gloomy housing forecasts don’t seem to apply here. Although new residential construction has slowed markedly, we haven’t seen a severe housing correction here, and we won’t as long as our economy is good, which it is. Economic conditions are the driver for housing. Since housing is also a main source of consumer buying (unlocking equity), we have had record retail sales tax revenue in the state, both from retail sales and from new construction materials.

A slowdown will happen, of course. For this reason, it is important that prospective buyers of investment real estate not overpay. Rule of thumb: don’t pay more than replacement value. This offers protection on the downside.

The other thing to begin watching out for as interest rates rise is ‘negative leverage’, which means that the lending institution makes more than you do. Avoid negative leverage but maximize positive leverage while rates are still affordable.
Also, for owners going for loans on investment properties, remember that lenders like longer term leases. You should too, especially now that lease rates are high and a slowdown may happen. Also, longer leases allow a longer amortization of tenant improvements, legal fees and brokerage fees.

Thurston County has done very well over these last three or four years. Certainly Lacey’s star continues its ascendancy: 2006 saw more than 800,000 square feet of business development, 140 new retail businesses, a 30% growth in sales tax revenues,
1452 residential and multifamily permits (probably commuters from counties to the north), yet crime went down by 10%. This year is starting out with robust numbers for retail and housing.

Even little ol’ Prime Locations has grown to manage almost $200 million in assets!

A few months ago Lacey celebrated its 40th birthday with a big bash at the Lacey Senior Center. While it is true that Lacey doesn’t really have a traditional ‘downtown’, nor a waterfront, what it does have is a very high level of community spirit and involvement. For example, in that large room at the Senior Center, almost everyone knew everyone else. Banter reflected the general atmosphere in and around the City. The City council was praised by its citizens, as was the City staff. Volunteers served 31,000 hours last year, which is the equivalent of 15 FTE’s (full time employees). A lot of value added there.

And Lacey has done the right thing with its sales tax revenue windfall: it is investing in infrastructure. Those capital improvements are exactly the right thing to do with that money. Since the City invested in the Marvin Road improvements in 2000, more than 2,500 new jobs have been created in Hawks Prairie. Great example of growth paying for growth...

Vacancies: The office market is tepid generally, but a little scary in the downtown Olympia area, where State offices continue to move out to satellite areas, leaving big holes in big downtown buildings. Our rental rates are historically high, which is good,  but high rents coupled with high costs for tenant improvements are keeping tenants wary.
Retail vacancies are negligible, probably in the 2% range. In Hawks Prairie, incredibly high prices (around $35. per square foot NNN for in-line space) don’t seem to dampen appetites. Everything in that area is jumping, but it’s pretty good across the board for retail.
Multifamily vacancies were a little high last quarter, but they’ve leveled off again to an acceptable 3%-4%. We continue to have trouble with getting creditworthy tenants.

Time to sell investment property?  Capital gains taxes at these rates will be gone soon, guaranteed. Some lawmakers don’t understand that higher capital gains taxes lock up revenue from gains, either by lost sales or by increased use of tax deferred exchanges. But since class warfare is the order of the day, costly shots in the foot will be commonplace.

BIG MONEY. Looking at a national and international picture, there is one thing that bothers me, and that is the amount of “private equity” money determining the course of private companies.  Publicly owned companies are no longer owned directly by small investors. Those investors now put their $10 trillion dollars into mutual funds and hedge funds. This is called institutional money.

And there are the tax advantaged funds too: huge blocks of money from underfunded government and teachers pensions need big (tax free) returns quickly in order to get their assets in line with requirements.

Pressure for the quick buck can undermine sound business decisions made by management for the long term growth and development of its companies. The private equity money may not have a stake in the future of that company, but it has enough votes to call the shots, then move on to something else. I believe this is a problem.

These big shareholders are prone to push a company to spin off profitable businesses or marginally producing operations for “turnarounds.” If they own enough shares, they elect directors sympathetic to their desires. This director’s objective is to increase shareholder value quickly--the short term pop. Let me give you two examples (one good, one bad) of how one local company has been affected by the actions of institutional shareholders.

The good example: Weyerhaeuser has been closing several of its manufacturing facilities and distribution centers. They were underperforming, and although layoffs are difficult, they probably should have been divested.

The bad example: Weyerhaeuser is the only company left that owns its own forestlands. Others have sold their forests to pension funds, insurance funds and REITs (real estate investment trusts). Weyerhaeuser Company is 82% owned by this institutional money. It is now under pressure by one large shareholder (18 million shares—7.6%) to sell off its forests to an REIT. Current tax law favors REITs: since they are not taxed as corporations, profits pass through untaxed to its shareholders. If the shareholders are tax exempt, no tax is paid.  Weyerhaeuser is a corporation and as such is subject to corporate taxes of 35%.  This large shareholder has pressured the company (I think) to bring on a director (Debra Cafaro) who is an REIT expert. The price of the stock has shot up, and the heat is on to make a decision based on things that may not have the company’s longer term best interests at heart. Owning its forests and managing them for the long haul has been Weyerhaeuser’s great strength. It has always operated as an integrated company. If it is forced to sell its forests so that some big money fund can boost its short term results, well, that just ain’t right.  Note: my husband and I own shares of Weyerhaeuser stock.

These things are happening to many companies all over the world. I don’t like this big money having so much power. It has resulted in too much consolidation of industries (banking, communications, etc.). Competition is reduced. Choices are limited. Service goes to hell. I don’t understand why the government is allowing monopolies again. We already went there and it wasn’t pretty.

I imagine the “fixes” are various, ranging from tax law (as in Weyerhaeuser’s REIT problem) to directors that have a long term stake in their companies and care more about them and their communities more than their own financial status. Those people do exist.

Finally, I’d like to introduce two new members of our staff: Melanie Griffith, receptionist, and Dale Carlson, Commercial Leasing and Sales agent.

I am so very proud to say that the staff and agents at Prime are consistently praised for their attention to our clients and customers. When you combine integrity and competence, you are the best of the best. I am lucky to work with folks like these.

                                                                        Priscilla S. Terry, CCIM, ed.

Please visit our website www.primelocations.com to see a complete listing of our properties for sale and for lease, as well as a comprehensive listing of our apartment communities for rent.