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PSU Center for Real Estate: November 2015 Quarterly Report

From the PSU School of Business Website:

PSU’s Center for Real Estate Quarterly publication offers  a snapshot of the commercial real estate and housing markets in the region. Each issue has several feature articles about real estate and development in the Portland area as well as an analysis of the trends in the commercial and residential markets. We appreciate the generous support of the Quarterly by the Oregon Association of Realtors (OAR) and the Regional Multiple Listing Service (RMLS).

Center for Real Estate Quarterly, November 2015 (full 92-page report)

_____________________________________________________Portland State University Center for Real Estate’s Quarterly Report, is produced with the assistance of the Oregon Association of Realtors and RMLS.

The past year has been a tumultuous one for housing policy in the Portland metropolitan area. Our regional government, Metro, has been engaged in determining whether the Urban Growth Boundary should be expanded. Apartment rents and home prices in the region have reached new historic highs, even after accounting for the 30 percent decline in prices following the Great Recession.

In the feature article in this issue, Dr. Gerard Mildner, Academic Director for the Center for Real Estate, describes the problem of Rent Appreciation and Gentrification in the region. The Portland metro area is producing today 20% fewer housing units than during 1990-2007, and apartment rents have reached historic highs. The proposed strategies of inclusionary zoning, linkage fees, demolition taxes, and housing set asides appear to be counter-productive. And Metro’s policy of reliance upon high-density development and a doubling of rents in the next twenty years to pay for that density will only increase our problems of slow economic growth, homelessness, and inequality.

From a property owner’s perspective, Oregon’s Residential Market continues its strong performance, especially in Portland. According to RMLS Student Fellow Clancy Terry, the average existing single family home price in the Portland metro area reached $310,000. The other two strongest markets in the state are Bend, which is on a five-year tear in home prices, reaching $327,000, and Benton County (Corvallis), where the average home price is $275,000. In the Portland market, the number of sales has been growing, prices are rising, and days on the market are shrinking. We are in a sellers’ market. Even so, home ownership in Oregon and the U.S. as a whole has hit 50-year lows. While demographics explain some of the decline, the rapid growth of home prices in the face of stagnant real wage growth has made home ownership more difficult.

The Multifamily Market remains a strong market for investors, landlords and developers. Axiometrics reports that rental rates in the Portland metro area have grown at more than double the rate of household income growth and Portland continues to one of the hottest rental markets in the country. NAI Norris, Beggs & Simpson find that market fundamentals such as shrinking vacancy rates and rising rent levels have driven up both property values and institutional acquisitions. On the other hand, Axiometrics finds that average rents remain below the 30% rent-to-income affordability benchmark for most renters. According to Clancy Terry, these conditions have also given rise to new developments that have mostly targeted the highest end of the Class A market, effectively “pricing out” many middle- and working-class renters. The Portland area submarkets with the lowest rents have also tended to have the lowest vacancy rates. Looking forward, there is an increasing likelihood that areas such as Gresham and Outer Northeast will see rising rental rates and—in turn—declining affordability.

The Office Market report finds the vacancy rate of 8.6% is the lowest level since the fourth quarter of 2007. However, vacancies are projected to return to historic averages as new construction and redevelopment projects deliver. Total deliveries of new office space are expect to rise 533,000 square feet in 2015 to 1.2 million square feet in 2016. Oregon Association of REALTORS Student Fellow, Alec Lawrence reports the tightest submarkets are the Lloyd District, with a vacancy rate of 4.1%, and Portland’s Central Eastside at 4.6%. According to Jones Lang LaSalle, asking rents in the Central Eastside now exceed those in Portland core downtown, $29.72 vs. $28.95 per square foot.

Portland’s Industrial Market continues to exhibit strong fundamentals. Despite over 1.2 million square feet of new warehouse space delivered in the quarter, net absorption is keeping pace with deliveries. According to Center for Real Estate Student Fellow Adam Seidman, the average industrial vacancy rate of 4.7% is a historic low, and the average warehouse rental rate of $0.46 per square foot is a record high. These trends are expected to continue as tenant demand for small and large spaces remains strong. An additional 2.5 million square feet of speculative space is in the pipeline and should be delivered in the next four quarters.

The Retail Market in Portland, which suffered the most of all the commercial markets during the Great Recession, has become a landlord and developer’s market, too. According to Alec Lawrence, the average vacancy rate has dropped to 4.7%, its lowest rate in years, with the average lease rate reaching $17.41 per square foot.  Retail growth is projected to continue in Central Portland, particularly from ground-floor retail in urban, mixed-use, multi-tenant buildings and grocery anchors looking to locate or expand in inner Portland. Also, retail marijuana dispensaries are appearing to do very well, since the opening of the legal recreational market on October 1, 2015, often outbidding other retailers for Class B space. At the same time, partly reflecting the barriers to entry posed by Portland Metro’s rigid urban growth boundary, observers expect to see a slight decrease in demand for suburban grocery-anchored centers.

Overall, the US Economy is starting the sixth year of economic recovery, with a projected GDP growth of 2.6% for the next two quarters. Despite slowing economic growth in China and Europe, US economic growth remains steady. Adam Seidman reports the Portland metro unemployment rate ticking up to 5.6%, slightly above the national average of 5.1%.  The Oregon Employment Department reports strong employment growth, particularly in high-wage occupations, such as high-tech manufacturing, professional and business services, and education and health services. The two main uncertainties moving forward are the timing and size of the Federal Reserve’s impending increase in interest rates and whether Oregon’s minimum wage will be raised significantly.