A variety of indicators suggest that the economic picture in Central Oregon is looking up. Employment numbers are improving, the commercial real estate market is seeing more action and banks are increasingly willing to lend money to qualified businesses.
Employment
Deschutes County’s seasonally adjusted unemployment rate measured 9.1 percent in November, down from 10.5percent a year earlier. Though this number is still high, Central Oregon is adding new jobs, and a diverse range of industries promises to help fuel the economic recovery. Growth industries include beer brewing, software development and robotics, bioscience, UAV (unmanned aerial vehicle) and aerospace manufacturing, and recreational equipment and apparel.
Commercial real estate
In the non-owner-occupied commercial real estate market (aka commercial investor real estate), good deals are still available, but bargains are becoming more difficult to find. These investments are viable, as interest rates are low and banks are willing to lend – cautiously – in this marketagain. Intent-to-lease agreements are no longer acceptable, however, banks wish to see buildings leased that have cash flow to service the debt payments.
Both the owner-occupied and investor real estate markets continue to see a moderate to high level of empty space, depending on the type of use (for example, the vacancy rate in Bend is 17 percent for office space and only 8 percent for retail)and location (the vacancy rate for industrial space is about 11 percentin Bend and 21 percent in Redmond).There are still decent buys but fewer bargains.
Larger commercial projects – buildings over 20,000 square feet – continue to bring risk, as these spaces are often specialized and few businesses in Central Oregon need large buildings.Smaller spaces for smaller businesses have higher occupancy and salability.
Small manufacturers and retailers are seeing a rebound, which is creating the need to expand, albeit cautiously.Many are considering remodeling or expanding existing facilities rather than purchasing or building a larger building.
For owner-occupied commercial real estate, borrowing money to expand, remodel or purchase, interest rates remain near historic lows. Banks are eager to lend though they are exhibiting a much more disciplined approach. To ensure repayment, banks look for borrowers with a strong cash flow, additional sources of income, a willingness to invest their own cash in the project, a healthy mix of debt and equity on their balance sheet, a good source of collateral, and evidence that they have been able to repay their debt obligations in the past.
Equipment loans and lines of credit
The economic recovery also means that many businesses are updating their equipment.During the recession many companies delayed upgrading, and equipment is now either becoming obsolete or depreciated out. Rates on equipment loans remain low, and changes in tax laws affecting how repairs are expensed may make buying new machinery more feasible.
Interest rates on lines of credit are still low as well, and banks are ready to lend to companies that have working capital needs or see seasonal fluctuations in their business. Banks look for high-quality inventory that is easily salable and high-quality accounts receivable that are collectible.
The overall use of credit lines is down, however. Many manufacturers are carrying minimal inventory, which reduces the need for working capital, and many companies are paying down debt in an effort to clean up their balance sheets. Cash on hand has been at an all-time high, reducing reliance on credit lines. And as the economy rebounds, many companies are paying their accounts payable more quickly, further reducing the need for reliance on credit lines to cover accounts receivable.
Taken together, these factors demonstrate an economy moving in the right direction. The recovery has been slow and unemployment is still high, but all indicators suggest that 2014 will see further improvement.
Tom Schnell, VP and Commercial Banking for Sterling Bank
