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  • Writer's pictureBlake Hering

Mortgage rates: Why Seattle’s CRE sales market is way hotter than Portland’s

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.

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