Western Real Estate Business

OCT 2018

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

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M A R K E T H I G H L I G H T: P O R T L A N D 32 • October 2018 • Western Real Estate Business www.REBusinessOnline.com Portland is a robust industrial market that features almost 204 million square feet of industrial product with a record-low vacancy rate of only 3.5 percent. Speculative development has been steady, as has built-to-suit development with more than 11.5 mil- lion square feet delivered in the past five years with another 4.4 million square feet under construction. Amazon has made a significant impact with three projects in Oregon totaling almost 3 million square feet of building footprint area and additional mez- zanine square footage in mezzanines. Portland's population has also been growing well faster than the national average. This city is now on the map as one of the West Coast's most desirable places to live, especially with the large Millennial generation. Portland has a strong and diverse manufacturing base which has grown in recent years, but the pri- mary driver of this industrial resurgence has been the increased demand for logistics and distribu- tion space. This is driven by increased consumer demand, but more importantly due to the shift in logistics strategy brought on by the ecommerce phenomenon. The trend is to have larger industrial footprints in each metro area with higher ceilings and with floor loads capable of handling heavy con- veyor systems to get products to consumers more quickly. Portland is well positioned to capitalize on this trend given its proximity to West Coast ship- ping ports, intermodal hubs and Interstate 5. Rental rates have increased dramatically over the past seven years. During the period between 2008 to 2011 (peak to trough), rental rates declined around 12 percent. Since that time, rates have increased al- most 40 percent on average (28 percent higher than previous peaks) with the strongest rental growth over the past three years. The rental rate spike in the past three years has been primarily due to a lack of inventory and shortage in new supply. Portland's primary hurdle to growth will be the current severe, almost emergency level, shortage of remaining shovel-ready industrial land. Amazon and the other 15.9 million square feet of new devel- opments absorbed many of the best sites, decimat- ing Portland's remaining industrial land supply. Developers are now scrambling to solve for infra- structure and entitlements on the few remaining sites which are challenged. Portland's geography also physically constrains supply due to topogra- phy and rivers. Given Portland's primary industrial submarkets are fully built out, the future of Portland industrial expansion will be south of Portland along the I-5 cor- ridor spine. One prime example is the I-5 Logistics Center site in Woodburn, which is 108 acres of in- dustrially zoned land recently annexed and zoned. This project is only 11 miles south of the Portland MSA, on the I-5 freeway and is one of the largest, if not the largest, shovel-ready industrial sites in the region. Specht Development was successful in final- izing the annexation and zoning on this site after several years of appeals. Additionally, Trammell Crow Company, Capstone Partners and PacTrust are active on projects in this area which further sup- ports this trend of growth southward. Portland's growing population, strategic location and supply constraints make Portland a very desir- able place to invest in industrial real estate. The cap- ital markets agree and are highly active in acquiring industrial properties in Portland as they recognize the lack of available land for new supply, which will lead to further strong growth in Portland industrial real estate values. Amazon is building a new 855,000-square-foot facility in Troutdale that will house 1,500 workers. DEMAND FOR DISTRIBUTION SPACE INCREASES IN PORTLAND Peter R. Stalick Senior Vice President and Partner, Kidder Mathews PDX'S MULTIFAMILY MARKET UNDERGOES CHANGE, BUT STILL GARNERS INTEREST Many prospective buyers are coming to Port- land from other West Coast cities, searching for more favorable yields than those found in their local markets. Strong employment growth and an increasingly diverse economy are fueling this heightened investor interest. Hiring in Portland continues to rise at a faster pace than the national average, primarily led by increased staffing in education and health servic- es. The steady pace of job growth is keeping unem- ployment low, underpinning household formation and driving a need for housing. The elevated costs of single-family homes, however, are keeping many individuals from transitioning into home- ownership and fueling the absorption of the met- ro's apartments. This is particularly true among the Class C segment where vacancy is nearing 2 percent. The tight rate for Class C space highlights the need for affordable housing options, which led to the creation of the inclusionary zoning policy. While the City of Portland and developers adapt to the new requirements, permitting for new rent- als has slowed considerably, potentially moderat- ing completions beginning in 2020. Construction will pick up this year as develop- ers work to complete the bulk of apartments that met the deadline before the new inclusionary zon- ing policy went into effect. Despite the increase, healthy demand and the limited availability of units will keep net absorption above supply addi- tions, cutting vacancy and supporting modest rent gains. Strong demand in several submarkets, such as Gresham/Far East Portland and Vancouver, will likely hold vacancy below 4 percent. These areas, as well as many other pockets with tight va- cancy, should strengthen investor demand during the coming months. The metro witnessed an increase in trades involv- ing Class A space over the past year. This, in turn, elevated the metro-wide average price per unit by 7.5 percent, or $176,000. During that time, buyers remained focused on apartment assets east of the Willamette River, with properties in the Kerns and Buckman areas garnering considerable attention. A surge of development in eastern Portland may provide investors additional opportunities at the top end of the market moving forward. Here, cap rates sit in the high 4 percent band, roughly 50 ba- sis points below the market average. On the west side of the river, investor demand picked up sig- nificantly in close-in neighborhoods like Nob Hill and Goose Hollow, attracting buyers from Califor- nia and Washington, and intensifying the bidding environment. Changes for retrofitting unreinforced masonry buildings may prompt some owners to sell their properties. The uncertainty around the specific requirements is creating concerns for some inves- tors. Many buildings are in desirable areas and are potentially worthwhile to buyers willing to make improvements. The finalization of the relocation ordinance may also slow transaction velocity for value-add prop- erties as owners would be required to pay reloca- tion fees to tenants if rent is increased by 10 per- cent or more and the tenant chooses to move. Though Portland is undergoing changes, includ- ing the addition of several new requirements, the merging of economic tailwinds and healthy apart- ment fundamentals should preserve investor in- terest in the coming months. Adam A. Lewis Vice President, Regional Manager and National Director, National Seniors Housing Group, Marcus & Millichap PHOENIX MULTIFAMILY SALES TRENDS * Trailing 12 months through 2Q18 Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics Sales Price Growth

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