Western Real Estate Business

JUL 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

Issue link: https://westernrealestatebusiness.epubxp.com/i/1001516

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Page 18 of 32

M A R K E T H I G H L I G H T: P O R T L A N D 18 • July 2018 • Western Real Estate Business www.REBusinessOnline.com PORTLAND'S MULTIFAMILY MARKET STRUGGLES TO GAIN TRACTION Housing permits have risen steadily from a low of 1,007 units permitted in 2009 to 10,319 in 2017. Despite this, ex- perts say housing has not accelerated enough to meet anticipated demand. Meanwhile, amid Greater Port- land's housing and affordability crisis, the Portland City Council implement- ed inclusionary zoning (IZ) on Feb. 1, 2017. Since then, permit applications in the City of Portland have dropped significantly. Of an estimated 25,000 affordable units needed, only 170 units have been permitted under the IZ guidelines. Publicly, city leaders appear unconcerned by this drop-off in permitting activity, citing a pipeline of about 19,000 market-rate, pre-IZ units. It will be interesting to see how many projects permitted pre-IZ will be shelved as a result of an increased cost of labor and materials. Since 2015, there has been a signifi- cant increase in vacancies, though this rate remains below 5 percent. Conces- sions appear largely in Class A close- in projects. Portland has new supply that has yet to be absorbed. For the first time since 2009, reports note rents were basically flat in April compared to a year earlier. Mean- while, REIS pegged Portland's cal- endar year 2017 rent growth above 3 percent. Portland saw high transaction vol- ume in 2017, but not as high as 2016 numbers. Much of that has to do with institutional properties above $10 mil- lion. There were 51 institutional trans- actions in 2016 compared to 37 in 2017. On the private-client side — prop- erties valued at less than $10 million — we saw only a slight decrease in transactions from 2016 to 2017. Trends for 2018 appear more or less flat but cannot yet be reliably identified. The City of Portland recently began requiring all landlords to pay tenant relocation fees ranging from $2,900 to $4,500 based on unit size. The city council will vote this fall on whether to adopt a warning notice that would be posted on unreinforced masonry (URM) buildings. The council will also vote next June on whether seis- mic retrofits will be required. Portland has budgeted funds for a landlord registry, and Commissioner Chloe Eu- daly has proposed adoption of a man- datory — and contentious — tenant screening assessment. Greater Portland's metro govern- ment is under pressure to expand the area's urban growth boundary and appears more willing to do so than in years past. Rental property own- ers will face a legislature when a new Oregon legislative session begins in early 2019 that will be composed of members more inclined than ever to scrap the state ban on rent control and to possibly end no-cause evictions. We anticipate a lack of on-market product even though significant capi- tal remains available for investment. With rent growth slowing, potential changes to landlord-tenant laws at the city and state level, and recent federal tax changes — many owners are tak- ing a wait-and-see attitude. Greg Frick Partner, HFO Investment Real Estate INDUSTRIAL FOCUS BOLSTERS COMMERCE FOR PORTLAND Portland has maintained one of the most robust industrial markets in the country, with vacancy rates that have been steadily decreasing since 2010 (currently 3.8 percent) and rents increasing 60 percent over the past five years, according to CBRE Research. The city has parlayed its ease of access to booming cities like San Francisco and Seattle, along with a relatively low cost of living into a flourishing status as a prime indus- trial hub on the West Coast. Portland's most impactful indus- tries to date include e-commerce, food and beverage production and distribution, third-party logistics and aerospace. This, coupled with a higher manufacturing base than most comparable markets in the country, has positioned the region to be a vital manufacturing market as more of these jobs are insourced. With a projected increase of manu- facturing and distribution jobs in the Greater Portland market over the next few years, net absorption is estimated to remain positive despite supply constraints. However, the lack of develop- able land is a growing concern that has pushed developers to pursue periphery sites they might have dismissed a decade ago. With ten- ants and businesses expanding the scope of where they are willing to locate, the city has experienced a boom of development in the North- east submarket. More than 1.2 mil- lion square feet of new construction was delivered in Gresham at Glisan Corporate Park and Vista Logistics Park alone earlier this year, which is a testament to the continued growth expected for the foreseeable future. The lack of available devel- opable land and rising demand are also contributing to the market's increased prices for existing sup- ply. The regional Metro Council is currently working with businesses and residents to determine whether the current land within the urban growth boundary will sustain the area for the next two decades. A de- cision to expand the boundary will come by the end of the year, which may provide some easement to pric- ing and future requirements. Nevertheless, there is 1.8 million square feet of active construction projects scheduled for delivery in the region in 2018. This new space will not only bring opportunity but will also likely have a large impact on av- erage asking lease rates, which have continued to trend upwards year over year. With under-construction developments 78 percent pre-leased and the majority set to deliver in 2018, absorption is anticipated to trend positively over the next 12 months. Portland's location, low cost of liv- ing and commitment to accommo- date budding industrial businesses will ensure Portland's steady growth for the future. By diversifying the tal- ent and focusing primarily on the in- dustrial sector, Portland has differen- tiated itself from the rest of the West Coast and has found its niche. Ashley Hill Senior Research Analyst, CBRE

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