Seattle Still Leads as Trepp Names Best and Worst CRE Markets

Every month, Trepp lists its three top bulls (best performers) and bears (worst performers) out of the 50 metropolitan statistical areas it follows. The choices are based on a composite comprising various commercial real estate performance indicators.

In July, the bulls were Seattle-Tacoma-Bellevue, WA; Phoenix-Mesa-Scottsdale, AZ; and San Jose-Sunnyvale-Santa Clara, CA. The bears were Memphis, TN-MS-AR; Milwaukee-Waukesha-West Allis, WI; and Kansas City, MO-KS.

August saw one change in either category. The middle bull became San Diego-Carlsbad, CA, and the middle bear was, Hartford-West Hartford-East Hartford, CT.

San Diego-Carlsbad, CA is the southwest-most part of the border boundary between the U.S. and Mexico. It is the 18th MSA ranked by population but “punches above its weight,” according to Trepp. Calling it an “objectively attractive place to live, work, visit, and shop,” the region has a strong tourism draw. The U.S. military has a strong presence, which adds to the local economy, as well as an active seaport, important for logistics and supply chains. Some of the strong industrial sectors are technology, healthcare, education, and biotechnology.

CRE in the area experiences a low delinquency rate and a high average debt-service coverage ratio. Office and multifamily are extensive, but there is high outstanding debt and relative maturing loan balance, as 12.35% of the total balance comes due in the next 12 months. There’s been a pullback in lending as only 2.98% of the total saw origins in the last 12 months.

Hartford-West Hartford-East Hartford, CT, on the other hand, is now one of the top bears. On the plus side, there is a diverse economy, with a heavy presence in insurance, finance, healthcare, and manufacturing. However, the office sector faces challenges like a shift of white-collar personnel to remote work and slow population growth. Industrial has been strong and retail and multifamily, recovering. Only 4.58% of the loan balance was originated in the last 12 months. However, only 6.04% of outstanding loans come to maturity in the next year. The small size of an oncoming maturity wall helps offset some weaker CRE factors.

Trepp also had two representative bull properties: Las Vegas-Henderson-Paradise, NV for lodging and Milwaukee-Waukesha-West Allis, WI for retail.

The former shouldn’t be a surprise given the popularity of Los Vegas as a vacation destination. Millions of people visit famous hotels and resort properties annually. Occupancy rates are recovering after the pandemic and the luxury segment of the market continues to expand. In addition, the convention and business events add another revenue source. New sports teams to the area like NFL’s Las Vegas Raiders and the NHL’s Las Vegas Golden Knights are additional draws. The occupancy rate is 93.28%, with delinquency only 0.21% and a combined net cash flow of $101,924,2. No properties have a DSCR of less than 1.

The latter’s retail sector has significant challenges, like 33.19% of outstanding retail debt not generating enough net operating income to cover debt service. There have been foot traffic reductions in Milwaukee’s downtown. Malls and department stores feel the impact of e-commerce.

However, neighborhood retail and specialty stores in affluent areas have had local support. Suburban areas have seen greater stability. The city is undertaking urban revitalization that, with shifting retail trends, offers new opportunities. Occupancy is 90.68%, delinquency is at 22.86%, and 18.73% of retail properties are on a watchlist.