Employment figures can have an effect on rates

The commercial mortgage market has remained frothy over the past month. That means lenders are still aggressively trying to place money in real estate.

As one lender puts it, "there's a dogfight for every deal."

The competition has helped keep rates low, and 5- and 10-year mortgage rates now range from 4.85 percent to 5.45 percent, according to the Barron's/John B. Levy & Co. National Mortgage Survey.

While lender competition has contributed to favorable rates for borrowers, the economy's lack of direction has helped keep U.S. Treasury yields low.

Many economists focus on national employment data as an indicator of economic health and, as a result, the information has a major effect on commercial mortgage rates. The most recent national employment report, released in the first week of September for August, was decidedly neutral, leaving investors uncertain and Treasuries mostly unchanged.

Although national employment data affect commercial mortgage rates, local employment figures are much more indicative of the strength of underlying real estate fundamentals.

According to a recent market report from Delta Associates, a real estate research group based in Alexandria, the Washington metropolitan statistical area enjoys the lowest unemployment rate in the country at 3.3 percent.

During the 12 months ended June 2004, the Washington MSA added more than 82,000 jobs twice the amount of jobs added in Los Angeles, the next closest MSA.

Further, Northern Virginia added 52,400 of those 82,000 jobs and by itself would rank higher than any other MSA.

According to information published by the Virginia Employment Commission, the Richmond-Petersburg MSA has added approximately 17,480 jobs during the 12 months ended July 2004 with a job growth rate of 3.3 percent. This is phenomenal job growth when compared to the Washington MSA's growth rate of 2.9 percent and the national average of 1.1 percent.

An analysis of the Virginia Employment Commission data for Chesterfield and Henrico counties shows job growth and jobs added in each county as remarkably similar. Although Henrico added approximately 40 more jobs than Chesterfield (4,902 compared to 4,865), Chesterfield had a slightly higher growth rate.

As in Northern Virginia and Washington, more jobs added to the local economy leads to higher apartment occupancy, more retail sales and higher office space occupancy.

Richmond clearly has absorbed plenty of retail space over the past year. So where are the opportunities in a market that is adding jobs?

The office market has strengthened. According to research from Grubb & Ellis/Harrison & Bates for the second quarter, office vacancies in the northwest quadrant of the market have shrunk to 12.2 percent from 13.4 percent during the same period in 2003.

The vacancy rate has gone down at the same time available square footage has increased by over 500,000 square feet. The southwest quadrant also saw fewer vacancies but occupied space was virtually unchanged.

The apartment market is solid. Charles Dalton, the president of Real Data, an apartment research group based in Charlotte, N.C., says Richmond's apartment market has held up well compared with other markets.

Despite adding over 1,300 units in the past year, overall vacancies have fallen from 8.8 percent in July 2003 to 8.5 percent in July this year.

Currently, the western Henrico submarket has the fewest vacancies and there are no new apartments under construction. The western Chesterfield submarket will add the most units in the next year, virtually two-thirds of the 1,000 units currently under construction.

Andrew Little is an investment banker with John B. Levy & Co. He can be reached at alittle@jblevyco.com

© 2004, Media General, Inc. All Rights Reserved