While Portland Changes, Its Vibe Remains a Constant

PORTLAND, OR—To be sure, there are shifts taking place in this market across most property types. For the first time in a long while, new industrial supply has outpaced demand. Moreover, new office development in the central business district has caused vacancy to increase from 10.2% two years ago to 11.8% as of fourth quarter 2019, according to a report by Cushman & Wakefield.

On the flip side, inclusionary housing along with state and local new housing policies have slowed down interest in multifamily development. And, albeit relatively stable, retail continues to face pressure from e-commerce.

But for now, the building boom continues in the Rose City.

“Using the popular baseball analogy, people used to ask, ‘what inning are we in?’ to gauge how much time was left in this real estate cycle. No one really asks that anymore, as it just keeps going and going,” says Jim Lewis, senior director of capital markets at Cushman & Wakefield.  “We are a far cry from 2010 when there was a lone crane in the downtown skyline casting shadows over Pioneer Square. That project, Park Avenue West, eventually kicked off construction in 2013 and was completed in 2016. Fast forward to today, there are currently 30 cranes operating just within the city of Portland, not including the surrounding areas. San Francisco by contrast has 23 cranes and New York, 27.”

While development has been broad-based among the various property types, there have been some notable trends by property type during the last 10 years, according to the Cushman & Wakefield report.

Some 8.8 million square feet of new office construction has completed including significant renovations.  While there have been some significant additions in the suburbs during the last 10 years such as the Intel and Nike campus expansions, most of the focus in the office market has been downtown and the close-in submarkets. Class-A rent in the CBD has increased 45.3% during the last decade while suburban class-A rent grow has been less than half of level at 21.2%.  In previous cycles, the CBD and suburban markets tended to move in lock step.

Nearly 50% of all new commercial construction during the last 10 years has been multifamily housing to the tune of 44,300 new units. Historically speaking, single-family building permits have been about double multifamily permits in any given year. However, since about 2013, multifamily permits have at least equaled single family every year and from 2017 to 2019, multifamily permits have soared well above those for single-family homes.

At 22.8 million square feet of new industrial flex construction, the industrial market has been on a tear for several years now with record low vacancy and surging rent, up 30% during the last 10 years. One of the biggest trends during this period has been the growth in size of new warehouses. In Portland, a 250,000-square-foot warehouse used to be considered a “big bomber” but now there are regularly 500,000 and 1 million-square-foot boxes.

Despite all the headlines about the demise of retail, the market has posted considerable growth with 6.6 million square feet of new construction and vacancy remains near historic lows at 3.4%. However, major new mall developments have been missing in the last 10 years and are not likely to reappear anytime soon. New construction has primarily been grocery-anchored shopping centers and large format freestanding stores as retailers continue to expand in the suburbs.

Hotels are second only to multifamily in terms of percentage growth during the last 10 years. With 4,066 new rooms, the Portland region has posted an increase in the total number of hotel rooms including the long-awaited 600-room Hyatt convention center hotel.

“By now, most investors have bought into the Portland story but it’s pretty astonishing to look at the raw numbers and see just how much growth there has been,” Lewis tells GlobeSt.com. “The 85 million square feet of new construction is almost equivalent to rebuilding Portland’s entire office market in just 10 years. With another 16 million square feet currently under construction, broadly speaking, we expect growth to continue. Portland has a lot of great things going for it in terms of an educated workforce, excellent transportation network, high growth industry clusters, affordable housing and easy access to the outdoors. We are also right in the middle of two hyper-dynamic job creators in the Bay Area and Puget Sound region. Companies in those areas are increasingly looking outward for talent and Portland is near the top of the list for expansion options.”

Amid these changes, Lewis points out that some things have remained squarely the same.

“Indeed, much has changed in the Portland commercial real estate market over the last decade, but that beloved Portland vibe and authenticity remains the same for the most part,” says Lewis. “And while growth has cooled from the blistering pace of a few years ago, from a real estate standpoint, fundamentals remain excellent and our near-term outlook bright. We enter this next decade on much stronger footing than where things stood 10 years ago. We have job growth, population growth and a low interest rate environment. This favorable combination should help continue to propel the Portland market forward.”