2018 SUMMARY / 2019 FORECAST

Cover Article By Howard Friedman, CCIM

It’s that time of year to take a look back at how we forecast the previous year. At the end of 2017 we delivered the following predictions:

“All the indicators we see point to another strong year in the commercial real estate market, both nationally and locally. Although 4th quarter economic reports from the Commerce Department recently announced a growth rate in 2017 of 2.6%, down from earlier predictions of 3.2%, it continued the trend of one of the longest periods of economic expansion in U.S. History. In short, Central Oregon is open for business in the commercial real estate market.”

Our prediction proved to be true. Compass Commercial had our best year ever, thanks to our valued clients. We foresee continued growth in Central Oregon in 2019, but are cautious beyond that, taking heed of global predictions beyond this year.

Summarizing the 2018 Market

Bend’s office market showed improvement in 2018. At the end of 2017, the vacancy rate stood at 3.61%, whereas at the end of 2018 it was 3.40%. Lease rates held fairly steady in the office market, with spaces being leased for $1.50–$2.00 per square foot per month triple net (NNN) for existing units (and depending on location and quality) and $2.00–$2.35 for newly built office space. The vacancy rate has now dropped eight years in a row in the office market, dating back to the end of 2010, when vacancies were 22.1% of the total market. At that time there was over 526,000 square feet of office space available for lease, while at the end of 2018 there was just over 87,000 sq. ft. available.

Retail vacancies in Bend also dropped from a rate of 2.8% at the end of 2017 to 2.77% at the end of 2018. Rental rates held strong again in 2018, with rents in the $1.50–$2.00 per sq. ft. NNN range and restaurants and new retail projects commanding $2.00–$2.75 or higher, in spite of many new projects coming out of the ground.

Bend’s overall industrial vacancy rate dropped again for the fifth year in a row, from 3.26% to an amazing 1.72%. Rental rates rose again to between $0.75 and $1.00 per sq. ft. per month NNN in 2018, with many flex buildings commanding rates much higher than that.

In Redmond, industrial vacancy rates dropped again for the seventh year in a row from 3.5% at the end of 2017 to just 1.9% at the close of 2018.

Supply vs. Demand

In the office market 10,587 square feet of space was absorbed in 2018, compared with 71,783 sq. ft. 2017. There is now only 87,331 sq. ft. available out of a 2.57 million sq. ft. market. Absorption slowed in 2018, but remained in positive territory.

In the retail sector, 34,335 sq. ft. of positive net absorption was recorded in 2018. This compared with 2017’s total of just 1,939 sq. ft. of positive net absorption. There is presently 123,663 sq. ft. available in the Bend retail market, with a slew of new projects looking to open in the next two years.

The industrial market recorded another 105,215 sq. ft. of positive net absorption in 2018, compared with 135,377 sq. ft. in 2017. There is currently only 73,833 total sq. ft. available in the Bend industrial market. Using market absorption calculation methods, this represents just three quarters of supply available in the Bend industrial market. Several buildings are being constructed in the Carmen Lp./American Ln. area and are scheduled to come online in 2019, which should ease any strains on the industrial leasing market.

And in Redmond 30,808 sq. ft. of industrial space was absorbed in 2018, compared to 24,588 sq. ft. of positive absorption in 2017. There is currently 30,251 sq. ft. of industrial space available in the Redmond market, just a one-year supply at current absorption rates, compared to the end of 2017, when 54,559 sq. ft. was available for lease in Redmond.

What’s Ahead?

Although there has been talk of a slowing economy nationally, we predict that commercial real estate in Central Oregon will continue to be strong, with rents slowing in their increases, but values staying robust—at least for 2019. Cap rates should rise a bit due to the recent interest rate increases, but all in all, we see a bullish market ahead.

Office: Rental rates will remain strong as supply continues to be tight in Bend. This mirrors national trends as the economy continues its steady growth. High land prices locally continue to be a challenge for developers wanting to start new projects. Strong construction and labor costs continue in the area, with some companies pointing to tariffs contributing to steel and appliance price increases. This will continue to squeeze the office market’s supply. Projects like Crane Shed Commons and Deschutes Ridge Business Park saw successful leasing during 2018, and there are few new office projects on the books for 2019.

Retail: Central Oregon’s retail market continues its strong growth and low vacancies. Several projects we mentioned last year, including the former Ray’s west side redevelopment, are still in the start-up or planning stages and many redeveloped retail properties saw strong absorption in 2018. Although Shopko recently announced its Bend store will close due to its impending bankruptcy proceedings, and Deschutes Brewery’s recent layoffs (caused by a slowing craft beer industry) will affect our workforce, there is still a dearth of qualified workers in some trades, notably the restaurant business, where many ‘now hiring’ signs grace storefront windows in Central Oregon.

Industrial: Strong industrial rents and limited supply continue in the Bend and Redmond markets. New projects in both areas may hold off any supply panic in 2019, but if the economy slows as predicted in a few years, it may well be a blessing that we did not overbuild during these bullish years.

Multifamily: Central Oregon continues a strong building phase in the multifamily market. Many new projects have eased the housing crunch, but the affordability issue is still prevalent in our community. Local community leaders are aware of the problem and are attempting to ease the situation, but it does not come easy. Will Bend follow Portland’s lead and implement some sort of rent control to assist low-income renters in their quest for fair housing prices? Many in the area hope not, but something must be done to help our neighbors be able to live and work in our community without the fear of becoming homeless or displaced out of our growing region.

Howard Friedman is a partner and the managing principal broker for Compass Commercial. He was recently promoted to president of the board of directors and CEO of the Bethlehem Inn homeless shelter in Bend.

To view the complete report and receive the quarterly publication, sign up at https://www.compasscommercial.com/POINTS or call (541)383-2444.

Compass Points® is a quarterly publication of Compass Commercial Real Estate Services offering comprehensive surveys of the Central Oregon commercial real estate market. The report provides a detailed look at quarterly vacancy and absorption data in office, retail and industrial product types throughout Bend’s primary submarkets, as well as the Redmond industrial market. Absorption data contained in the report pulls from samples of buildings over 3,000 sq. ft.