SAN FRANCISCO—Late last year, I began research that examinedwhere we were in the current economic cycle and how that related tothe robust commercial and multifamily markets we were seeing atthat time. Now that 2013 is in the books and we have first-quarter2014 data available, I wanted to revisit that discussion.

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At that time, the macroeconomic recovery was proceeding at apainfully slow pace. That sluggish trend, as predicted, hascontinued. While we attempt to extrapolate any good news regardingnon-farm payroll employment gains, the truth is that those gainshave been minimal to non-existent. If you assume we need to add onthe order of 150,000-200,000 new jobs each month just to keep upwith population growth, the data we've seen over the past severalyears has been disappointing. The unemployment rate currentlystands at 6.1% and from a statistical standpoint, we have recoveredall of the 8.7 million jobs that were lost during the recessionthat began in December 2007 and lasted until June 2009. Thesefigures may seem reason enough for optimism. But more telling isthe Labor Force Participation Rate, which is a measure of thepercentage of working-age persons in an economy who are eitheremployed or are actively seeking employment. While that measurestood at 66.0% in December 2007, it has trended downwarddramatically to its current level of 62.8% according to the Bureauof Labor Statistics. This represents the lowest rate since1979.

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Despite these headwinds, the commercial and multifamily realestate markets have continued to thrive. For almost every propertytype in in every market, trends are headed in the right direction:rents and absorption rates are up and vacancies and cap rates aredeclining. This has led to a strong investment sales market, withvolumes surging at the end of last year. According to theMortgage Bankers Association and RealCapital Analytics, sales rose 28% in the fourth quarterover third quarter levels to finish the year at approximately $316billion, 19% ahead of 2012 levels.

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All of the major property types experienced increases, led byoffice, which exceeded 2012 levels by 28%. We also continue to seeincreased activity from foreign-based capital seeking U.S. realestate's relatively attractive yield. Q1 figures continue thistrend, with sales volumes up $87 billion or 15% year over year,according to RCA. Pricing trends continue to be positive across allproperty types, with cap rates falling 10-20 basis points.

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From a financing standpoint, as predicted, the lending marketclosed 2013 with a show of strength, up 34% from Q3, according tothe MBA. In fact, the volume of loans originated during the fourthquarter was the highest since 2007 and pushed the 2013 yearly totalto approximately $280 billion, 12% above 2012 levels. This strongperformance year over year was enjoyed almost across the board withCMBS up 33%, banks up 32%, and insurance companies up 25%. Only theagencies, as expected and in fact mandated, saw a decrease inlending volumes, down 18% year over year. Q1 figures were justreleased and reflect a 0.4% increase in the level ofcommercial/multifamily debt outstanding over year-end figures,another record. This was led by a 1.8% increase at banks, followedby a 1.0% increase for the agencies, and a 0.7% increase for lifeinsurance companies; CMBS experienced a decline in their holdingsof 2.0%.

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From a property standpoint, it's no surprise that multifamilyremains the preferred property type, with loan originations growingat a faster rate than the other food groups. The apartmentfinancing market is very healthy and lenders still can't seem toget enough of the product type. While apartment construction isbooming in certain markets and some people are openly concernedabout oversupply, it certainly seems to be a landlord's market andshould remain so for some time given the demographics of today'srenters.

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Office continues to tread water in most markets although it isthriving in a select few coastal areas. In previous downturns, wehave seen the office market recover much more quickly. That isstubbornly not the case this time around. This property type, morethan any other, depends on job creation, which, as noted above, isjust not happening. Until we start adding jobs at a much more rapidpace, this sector will continue to bump along. While rents are upin most markets and vacancy is down, the trends are much moresedate. Although construction is taking place in some MSAs, tenantdemand generally remains strong so new supply should not be aproblem in the near future.

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From a retail standpoint, except for the most strategicallylocated centers, this sector continues to be a challenge. It is thebroadest property type with more question marks than the others.Consumer confidence is the key here since consumption makes up 70%of GDP. After bottoming out at -1.6% in 2009, the increase inconsumer spending was 2% in 2010, 2.5% in 2011, 2.2% in 2012 and2.3% in 2013. Projections for 2014 are between 2.5-3.0%. Thesefigures are largely unremarkable and point to slow growth in thissector for the next few years at least.

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Most life companies won't originate on anything that isn'tgrocery/drug anchored, so the fact that banks and conduits are soactive is a good thing for this property type. E-commerce is alwaysa threat to this sector, but construction remains in check.However, proceed with caution until we get a better read on theconsumer and can determine if the recent increase in confidence issustainable or fleeting.

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Industrial is still industrial. They're quick and easy to build,so oversupply is never really a problem; that remains true intoday's market, where construction is at an historic low. Theproblem the retail sector has with e-commerce is actually a benefitto industrial product from both a distribution and logisticsstandpoint. Lenders love industrial. The biggest problem theyusually have is filling the appetite, since generally you need aportfolio of smaller properties to get to a loan amount thatexceeds a lender's minimum. This is especially true for lifecompanies.

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The financing market remains healthy for all of these propertytypes. We have seen banks pulling back some on their longer termnon-recourse offerings but they are still very active, with 35.8%of the mortgage debt outstanding on their books. Thanks to thefederal government, their cost of funds is basically zero. They arenot requiring a depository relationship with new clients and,except for a select few, they're actually discouraging it. Despitethis competition, life companies are off to a great start this yearas well and first quarter figures show they increased theirholdings by $2.4 billion.

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Conduits are definitely back in force. My understanding is thereare now 44 different conduits. That's a lot of mouths to feed andshould bode well for keeping the financing market ultra-competitivethis year. We've also seen a number of niche lenders who have donea fantastic job of filling the gap that exists between theoutstanding balance on maturing loans underwritten during anaggressive time and the levels they could be refinanced at today. Afew years ago, we all read the dire projections of how much debtwas maturing over the next several years and wondered how we'd fillthe void. The market has certainly stepped up and answered thechallenge. Overall, real estate remains a superior investment froma relative value standpoint, so the fun should continue for thenext few years!

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Dennis Sidbury is SVP and director with NorthMarq Capital inSan Francisco. He may be contacted at [email protected]. Theviews expressed here are the author's own.

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