As businesses and residents return to greater downtown area, new retail investment possibilities emerge
Denis O'Neill, Associate Vice President, NAI NBS
Tired of doom and gloom in the real estate world? We are clearly in a down cycle driven by the implosion of the financial markets. However, if you are not inclined to spend 2009 searching the globe, do solid retail real-estate-investment opportunities exist right here in Portland? Here’s a tip: Follow the money.
Since the late 1970s, civic and business leaders have pursued a strategy to stop the suburban flight of retail and office businesses. Through the Portland Development Commission, public resources were channeled back into the core, initially through the establishment of the urban renewal districts, and later through substantial infrastructure investment in light rail and the streetcar. Propelled by the city’s desire to increase residential density around mass transit and fueled by property tax subsidies, we saw an explosion of condominium units.
New commercial investment followed residential growth and continues throughout the Central Business District and Northwest Portland. The Pearl District’s success is flowing both across Burnside to the west side of downtown and up Burnside toward Northwest 23rd Avenue.
On the south end of downtown, Portland State University and Oregon Health Science University’s ambitious expansion plans are linked both by the streetcar and the tram to Portland’s newest neighborhood, the South Waterfront District. South Waterfront boasts multiple high-rise apartment and condominium buildings, such as the John Ross and Meriwether, and a growing number of retailers, from a bank and restaurants to a neighborhood market and dry cleaner.
Dead zones are disappearing and districts are growing together. For years, talk of a 24-hour downtown was a planner’s mantra and little more. A city where people lived, worked and played seemed futuristic. Are we at a tipping point?
Two demographic trends appear irreversible. First, no one wants to commute. The rebirth of neighborhoods and commercial corridors near downtown, such as Southeast Belmont, Southeast Hawthorne, Northeast 28th Avenue and now, North Mississippi, were early indicators that an increasing percentage of people were rejecting the suburban lifestyle.
People are seeking a more diverse, urban lifestyle, minimizing the need for a car for work and play. An estimated 11 percent of the Portland metro area’s workforce walks, bikes or rides mass transit to get to work. The increase in gas prices has only encouraged this trend, and TriMet ridership continues to rise.
Portland’s unique neighborhoods and downtown are heralded by travelers and national publications alike. For instance, Travel + Leisure’s America’s Favorite Cities 2008 ranked Portland No. 1 for public transportation and pedestrian friendliness, safety, cleanliness, public parks and environmental awareness.
Second, young professionals and creative types want to work close to downtown. Leasing agents consistently report that companies are now trying to relocate from suburbia to the core, and recruitment and retention of talent are the drivers. This is a fundamental business shift.
So where are the investment opportunities? If you believe the lure of working and living near the core is going to only grow stronger, downtown real-estate values will surely benefit.
For the last year we have been dealing with a wide gap in the “ask” and “bid” resulting in a nationwide drop in the number of investment sales. Though buyers were quick to price in new financing costs, sellers were not ready to accept lower prices. Prices are now falling as available financing shrinks. The average cap rate for core office and retail properties is now about 7.5 percent, up from the low 6-percent level in early 2007. In addition to a rollback in rental rates, credit restrictions have finally forced sellers to acknowledge the new financing realities.
In emerging commercial areas like South Waterfront, the ground-floor retail space is being built as an amenity to attract condominium buyers. Until a critical mass of retail is reached, the retail components are being offered for lease and sale at subsidized rates. Rents are in the $25 NNN per-square-foot range, 10 to 20 percent below the market for established spaces. This translates to sale values in the low $300 per-square-foot range, well below construction cost for a Class A building.
However, South Waterfront has distinct advantages over earlier urban renewal areas. For the initial retail developments to be successful they must generate customers besides neighborhood residents. OHSU, Portland’s largest employer, is an engine that will continue to deliver research and medical space to South Waterfront and its 35-acre Schnitzer campus.
Plus, the sheer scale of the density and construction is unprecedented. Despite the downturn, South Waterfront will deliver more residential units, office and retail in five years than seen in the first 10 years in the Pearl.
South Waterfront may be the obvious example of where public and private investment creates opportunities for investors. But years of investment in Portland’s core, ever-increasing density, lifestyle and demographic trends make solid purchases in all of Portland’s areas near downtown a very good bet.
Thursday, October 16, 2008
Thursday, October 2, 2008
Differentiate Yourself and Your Service
Jennifer Medak, Vice President, NAI NBS
Today's shifting economy provides a great opportunity for brokers to truly focus on client interests, being aggressive and creative in weathering the storm. Forget you are a broker and put yourself in the shoes of your client. The empathy, struggles and challenges they face are as real as yours, so by solving their problems you will be solving your own. Spend more time with your owner clientele to make sure their needs are being met with market updates, competitive analyses or by taking them on a tour of their competitor's properties. Sublet their spaces or portions of them to alleviate financial burden. On the tenant side, focus efforts within your area of expertise to ensure that you have the leading market share. Move tenants into more appropriate space, if applicable. In all transactions, negotiate with more detailed market information on renewals. Demonstrate that your knowledge of construction costs, operating expenses and motivation are critical to your client's success, and be prepared to go well beyond the sticker price quoted on your marketing materials. Lastly, believe in your expertise and use it, because this (market) too shall pass.
Today's shifting economy provides a great opportunity for brokers to truly focus on client interests, being aggressive and creative in weathering the storm. Forget you are a broker and put yourself in the shoes of your client. The empathy, struggles and challenges they face are as real as yours, so by solving their problems you will be solving your own. Spend more time with your owner clientele to make sure their needs are being met with market updates, competitive analyses or by taking them on a tour of their competitor's properties. Sublet their spaces or portions of them to alleviate financial burden. On the tenant side, focus efforts within your area of expertise to ensure that you have the leading market share. Move tenants into more appropriate space, if applicable. In all transactions, negotiate with more detailed market information on renewals. Demonstrate that your knowledge of construction costs, operating expenses and motivation are critical to your client's success, and be prepared to go well beyond the sticker price quoted on your marketing materials. Lastly, believe in your expertise and use it, because this (market) too shall pass.
If You Build It, They Will Come
Developers bank on demand for Class A office space in Central Business District
Sean Turley, Vice President, NAI NBS
If you build it, will they come? The popular answer to this question is yes. Developers are building new office space to meet demand and fill the limited supply in Portland’s Central Business District. First & Main will be the first CBD building to be delivered, providing approximately 350,000 square feet in 2010, followed by Park Avenue West adding an additional 330,000 square feet of Class A office space.
So why are developers pouring hundreds of millions into new construction, while tenants remain jittery about cash flow and may be tightening belts rather than loosening them? The answer is simple: supply and demand economics. Single-digit Class A vacancy, rising rental rates and diminishing supply of larger blocks of office space suggest that Portland’s CBD isn’t experiencing the economic doom and gloom of other markets in the nation. Sure, downtown has had to navigate its fair share of slow periods, and the meltdown in the credit markets didn’t help, but overall the CBD remains healthy for development.
Tripwire’s recent 36,000-square-foot lease at One Main Place has further diminished the availability of large blocks of space, and larger users are feeling the squeeze. With One Main out, now KOIN Center and Crown Plaza are the only existing Class A buildings that can accommodate a tenant seeking more than 30,000 contiguous square feet – just two buildings to choose from in the entire CBD. Developers are paying attention, and as a result, cranes are in the air.
It is clear that the limited supply points favorably toward development, but the concern has always been demand. Several signals suggest that demand will be there, but only time will tell.
The first signal is renewed interest in downtown. Blame it on high gas prices, but the CBD is seeing a resurgence from suburban tenants interested in relocating downtown. This is a fundamental shift, since for years the CBD lost tenants seeking abundant free parking and a more favorable tax situation offered in suburban markets. The ability to draw from a deeper employment pool, central location and easy public transportation options are helping drive this shift.
Another factor helping drive demand in the CBD is sustainability. Firms are feeling increased pressure to be environmentally conscious and provide a healthy work environment for their employees. Most new construction is being developed to some level of LEED (Leadership in Energy and Environmental Design) standard while most existing buildings have few to zero sustainable elements. LEED-certified construction is in demand as it helps companies recruit and retain employees, especially in environmentally conscious Oregon. Further, “green” is arguably the new growth industry coming to town, as wind, solar and other sustainable industries are growing and expanding across the metropolitan area.
Lastly, demand could come from outside Oregon. Even though rents are on the rise, Portland is still the low-cost leader when it comes to West Coast options. It is not out of the question for demand to start coming from growing or relocating firms from the San Francisco and Seattle areas. Although Portland is courting business from other markets, historically absorption in the CBD occurs from organic growth. Typical lease up for new construction comes from existing tenants looking for newer and more efficient office space. This usually leaves a sizable hole to fill in the tenant’s former building and will create some opportunity for tenants in the Class B and C markets. Landlords with this product still have to compete for deals, but even these rates will eventually be pulled up by the limited supply in the Class A market.
The health of Portland business needs to be strong as it will clearly have to absorb higher rental rates in the coming years. Contributing to these increased rates are rising costs for both new construction and those to provide tenant improvements. Institutional buyers looking for opportunity in Portland are also adding to higher rents. These buyers have concluded that they can press rental rates in Portland easier than other areas of the nation. As a result, institutional buyers have paid top dollar for Portland assets and immediately pressed rates to justify their purchase price.
With limited supply, clear projections that rental rates are on the rise, and reasonable assurance that demand is healthy, developers are feeling confident that if they build it, tenants will come.
Sean Turley, Vice President, NAI NBS
If you build it, will they come? The popular answer to this question is yes. Developers are building new office space to meet demand and fill the limited supply in Portland’s Central Business District. First & Main will be the first CBD building to be delivered, providing approximately 350,000 square feet in 2010, followed by Park Avenue West adding an additional 330,000 square feet of Class A office space.
So why are developers pouring hundreds of millions into new construction, while tenants remain jittery about cash flow and may be tightening belts rather than loosening them? The answer is simple: supply and demand economics. Single-digit Class A vacancy, rising rental rates and diminishing supply of larger blocks of office space suggest that Portland’s CBD isn’t experiencing the economic doom and gloom of other markets in the nation. Sure, downtown has had to navigate its fair share of slow periods, and the meltdown in the credit markets didn’t help, but overall the CBD remains healthy for development.
Tripwire’s recent 36,000-square-foot lease at One Main Place has further diminished the availability of large blocks of space, and larger users are feeling the squeeze. With One Main out, now KOIN Center and Crown Plaza are the only existing Class A buildings that can accommodate a tenant seeking more than 30,000 contiguous square feet – just two buildings to choose from in the entire CBD. Developers are paying attention, and as a result, cranes are in the air.
It is clear that the limited supply points favorably toward development, but the concern has always been demand. Several signals suggest that demand will be there, but only time will tell.
The first signal is renewed interest in downtown. Blame it on high gas prices, but the CBD is seeing a resurgence from suburban tenants interested in relocating downtown. This is a fundamental shift, since for years the CBD lost tenants seeking abundant free parking and a more favorable tax situation offered in suburban markets. The ability to draw from a deeper employment pool, central location and easy public transportation options are helping drive this shift.
Another factor helping drive demand in the CBD is sustainability. Firms are feeling increased pressure to be environmentally conscious and provide a healthy work environment for their employees. Most new construction is being developed to some level of LEED (Leadership in Energy and Environmental Design) standard while most existing buildings have few to zero sustainable elements. LEED-certified construction is in demand as it helps companies recruit and retain employees, especially in environmentally conscious Oregon. Further, “green” is arguably the new growth industry coming to town, as wind, solar and other sustainable industries are growing and expanding across the metropolitan area.
Lastly, demand could come from outside Oregon. Even though rents are on the rise, Portland is still the low-cost leader when it comes to West Coast options. It is not out of the question for demand to start coming from growing or relocating firms from the San Francisco and Seattle areas. Although Portland is courting business from other markets, historically absorption in the CBD occurs from organic growth. Typical lease up for new construction comes from existing tenants looking for newer and more efficient office space. This usually leaves a sizable hole to fill in the tenant’s former building and will create some opportunity for tenants in the Class B and C markets. Landlords with this product still have to compete for deals, but even these rates will eventually be pulled up by the limited supply in the Class A market.
The health of Portland business needs to be strong as it will clearly have to absorb higher rental rates in the coming years. Contributing to these increased rates are rising costs for both new construction and those to provide tenant improvements. Institutional buyers looking for opportunity in Portland are also adding to higher rents. These buyers have concluded that they can press rental rates in Portland easier than other areas of the nation. As a result, institutional buyers have paid top dollar for Portland assets and immediately pressed rates to justify their purchase price.
With limited supply, clear projections that rental rates are on the rise, and reasonable assurance that demand is healthy, developers are feeling confident that if they build it, tenants will come.
How is the California Multifamily Investor Affecting the Portland Market?
Plenty of real estate opportunities exist as occupancy rates remain high in area
Eric Shreves, Senior Real Estate Broker, NAI NBS
The condo-converting developer and the perceivably aggressive California investor have been leading actors shaping the expiring market cycle for local mid-market apartment properties. One need not be too bright to guess that condo developers are more cautious than they were 18 months ago. The California investor’s status has not received as much attention, but is equally important.
In 1999, mid-market multifamily investors from California represented 4 percent of buyers. That number skyrocketed to 27 percent in 2005, slipped to 25 percent in 2006 and dropped to 14 percent in 2007. Conventional wisdom says that these California investors drove cap rates down and values up. But was this really the case? If true, have values dropped as Californians have become less active in the local market? How do investors navigate this new climate?
About 70 percent of California investors come from the northern part of the state. What was happening in Northern California and the Portland metro area in 2005 to make the California investor such an influential player in our market? In the San Francisco-Oakland-Fremont market, the average price per unit was $167,825 and the average cap rate was 4.84 percent. In the Portland area, investors were enjoying an average price per unit of $61,057 and a 6.65-percent cap rate.
So California investors were simply chasing better returns than what was achievable in other major markets on the west coast. Through 2006, Portland offered the best cap rates on the west coast and was surpassed west of the Rocky Mountains by only Salt Lake City. However, family connections are another motivating factor influencing these investors to become active in the market.
Institutional investors may be purely focused on rate of return, but private entrepreneurial investors have more complex motivations. It’s not unusual to speak with a California investor who has a relative who recently moved to the Portland area and is looking for a project they can work on together. As more Californians move into our metro area, they will bring with them family and social connections that provide capital and expertise to make them real players in our marketplace. This is a difficult dynamic to quantify, but it is common enough to consider it a substantial influence in the rise of the California investor.
Many property owners expect California investors to pay prices previously unheard of. On its face it makes sense. Homeowners moving from San Francisco, where an average home costs $700,000, see similar houses for $350,000 in Portland and think this is a bargain basement price. A multifamily investor facing an acquisition cost of $167,000 per unit in San Francisco might find $61,000 per unit in Portland attractive. Most developers can’t replace a unit for $61,000. However, has the California investor consistently paid more for multifamily units than local investors?
The facts reveal that California investors have not paid substantially more for mid-sized multifamily property than their local competitors. Starting with the current market cycle in 2003, following the last local recession, California investors actually paid less than local investors on both a price-per-unit and cap-rate basis. Since 2003, California investors have paid an average of $5,482 less per unit than local investors and 26 basis points higher than local investors with cap rates. Of course, there are enough examples of aggressive buying to nurture this conventional wisdom. One subplot has been the activity of California investors in East Multnomah County.
Since 2003, California investors have made up almost 30 percent of East Multnomah County property buyers. Have they been paying premiums in that submarket above what local investors have been paying? Not exactly. If we analyze the highest achieved values on a price-per-unit basis in East Multnomah County, we find that 26 percent of that segment was from California and 70 percent were local investors.
Although California investors have not been primarily responsible for pushing values up and cap rates down in our market, they have played a substantial role by providing competition for limited local product. And that has indirectly affected values. However, they have been increasingly less interested in our market. In 2006, 25 percent of buyers hailed from California, but that number dropped to 14 percent in 2007. Did the decreased competition from California result in lower pricing in 2007 for local investors? Fortunately for sellers and unfortunately for buyers, this was not the case.
The average price per unit in the metro area in 2006 was $66,036 with a 6.43-percent cap rate. In 2007, after a 56-percent reduction in California buyers, the average price per unit increased slightly to $66,920 with a 6.15-percent cap rate. Now, 2008 seems to be a transitional period.
For the first two quarters of 2008, the main story of this market hasn’t been the emergence or disappearance of the California investor, but the slowdown in transaction velocity. To date this year, the Portland area has seen 48 total transactions for mid-market apartments. In context, the market has been averaging 115 in the first two quarters of each year during this market cycle. There is increased inventory available on the open market, but the bid-ask gap is wider than we have experienced in recent times.
Investors still have much to cheer about. The Portland market shows strong occupancy across the board that yields vacancy rates reflective of typical turnover rather than economic distress or increased supply. Most submarkets will be supply constrained for the foreseeable future due to land constraints and construction costs. Surrounding oneself with good counsel from an informed broker and property management professional will continue to be essential. For investors interested in selling an asset, it will be important to ensure expectations and pricing is in accord with emerging market conditions to capture a prospective buyer. For prospective buyers, it will become more important to identify value-add opportunities or core assets with reasonable sellers. No matter the market situation, active investors can always find opportunities.
Eric Shreves, Senior Real Estate Broker, NAI NBS
The condo-converting developer and the perceivably aggressive California investor have been leading actors shaping the expiring market cycle for local mid-market apartment properties. One need not be too bright to guess that condo developers are more cautious than they were 18 months ago. The California investor’s status has not received as much attention, but is equally important.
In 1999, mid-market multifamily investors from California represented 4 percent of buyers. That number skyrocketed to 27 percent in 2005, slipped to 25 percent in 2006 and dropped to 14 percent in 2007. Conventional wisdom says that these California investors drove cap rates down and values up. But was this really the case? If true, have values dropped as Californians have become less active in the local market? How do investors navigate this new climate?
About 70 percent of California investors come from the northern part of the state. What was happening in Northern California and the Portland metro area in 2005 to make the California investor such an influential player in our market? In the San Francisco-Oakland-Fremont market, the average price per unit was $167,825 and the average cap rate was 4.84 percent. In the Portland area, investors were enjoying an average price per unit of $61,057 and a 6.65-percent cap rate.
So California investors were simply chasing better returns than what was achievable in other major markets on the west coast. Through 2006, Portland offered the best cap rates on the west coast and was surpassed west of the Rocky Mountains by only Salt Lake City. However, family connections are another motivating factor influencing these investors to become active in the market.
Institutional investors may be purely focused on rate of return, but private entrepreneurial investors have more complex motivations. It’s not unusual to speak with a California investor who has a relative who recently moved to the Portland area and is looking for a project they can work on together. As more Californians move into our metro area, they will bring with them family and social connections that provide capital and expertise to make them real players in our marketplace. This is a difficult dynamic to quantify, but it is common enough to consider it a substantial influence in the rise of the California investor.
Many property owners expect California investors to pay prices previously unheard of. On its face it makes sense. Homeowners moving from San Francisco, where an average home costs $700,000, see similar houses for $350,000 in Portland and think this is a bargain basement price. A multifamily investor facing an acquisition cost of $167,000 per unit in San Francisco might find $61,000 per unit in Portland attractive. Most developers can’t replace a unit for $61,000. However, has the California investor consistently paid more for multifamily units than local investors?
The facts reveal that California investors have not paid substantially more for mid-sized multifamily property than their local competitors. Starting with the current market cycle in 2003, following the last local recession, California investors actually paid less than local investors on both a price-per-unit and cap-rate basis. Since 2003, California investors have paid an average of $5,482 less per unit than local investors and 26 basis points higher than local investors with cap rates. Of course, there are enough examples of aggressive buying to nurture this conventional wisdom. One subplot has been the activity of California investors in East Multnomah County.
Since 2003, California investors have made up almost 30 percent of East Multnomah County property buyers. Have they been paying premiums in that submarket above what local investors have been paying? Not exactly. If we analyze the highest achieved values on a price-per-unit basis in East Multnomah County, we find that 26 percent of that segment was from California and 70 percent were local investors.
Although California investors have not been primarily responsible for pushing values up and cap rates down in our market, they have played a substantial role by providing competition for limited local product. And that has indirectly affected values. However, they have been increasingly less interested in our market. In 2006, 25 percent of buyers hailed from California, but that number dropped to 14 percent in 2007. Did the decreased competition from California result in lower pricing in 2007 for local investors? Fortunately for sellers and unfortunately for buyers, this was not the case.
The average price per unit in the metro area in 2006 was $66,036 with a 6.43-percent cap rate. In 2007, after a 56-percent reduction in California buyers, the average price per unit increased slightly to $66,920 with a 6.15-percent cap rate. Now, 2008 seems to be a transitional period.
For the first two quarters of 2008, the main story of this market hasn’t been the emergence or disappearance of the California investor, but the slowdown in transaction velocity. To date this year, the Portland area has seen 48 total transactions for mid-market apartments. In context, the market has been averaging 115 in the first two quarters of each year during this market cycle. There is increased inventory available on the open market, but the bid-ask gap is wider than we have experienced in recent times.
Investors still have much to cheer about. The Portland market shows strong occupancy across the board that yields vacancy rates reflective of typical turnover rather than economic distress or increased supply. Most submarkets will be supply constrained for the foreseeable future due to land constraints and construction costs. Surrounding oneself with good counsel from an informed broker and property management professional will continue to be essential. For investors interested in selling an asset, it will be important to ensure expectations and pricing is in accord with emerging market conditions to capture a prospective buyer. For prospective buyers, it will become more important to identify value-add opportunities or core assets with reasonable sellers. No matter the market situation, active investors can always find opportunities.
Bar is Raised by Real Estate Seekers
New industry clusters in Silicon Forest demand green office spaces
Jeff Borlaug, Vice President, NAI NBS
In the beginning, there was Intel.
In the 1970s, the world’s largest semiconductor company chose Hillsboro as the site for its first plant outside California. Spin-off companies from locally-owned Tektronix shared the area, known as the Sunset Corridor after Highway 26. In the 1980s came Japanese-owned manufacturing companies. They, in turn, begat suppliers and customers of these leading companies, attracting industry clusters in software, communication devices, internet providers and manufacturing.
The Silicon Forest became known as the land of opportunity as the dot-com bubble inflated in the late 1990s, but the proverbial flood came with the dot-com burst of 2001. In regard to vacancies, the Sunset Corridor is still on the road to recovery. But the founding fathers of the area have left their stamp – an imprint of innovation, technology, and social consciousness. As such, Hillsboro is ripe to become the next hub for sustainable development in the Portland metropolitan area.
At present, only the Central Business and Pearl Districts have rental rates high enough to justify new construction that meets Leadership in Energy Efficiency Design standards. Kruse Way will be the next to deliver sustainable office space with Kruse Oaks III, estimated to arrive in 2009. Developers hope to obtain a LEED Gold rating, which will fetch rates more than $33 per square foot.
Next up? The Sunset Corridor. Vacancy rates plummeted from 28 percent in the second quarter of 2007 to 17 percent by the first quarter of 2008. As vacancy continues to drop over the next two to five years, developers will begin to build on speculation. Build-to-suit space could happen even sooner, particularly with interest from an out-of-market or new company. Economic motivators have been put in place on federal, state, and local levels.
Sustainable construction is the natural progression for development along the Sunset Corridor due not only to the profile of its past tenants, but also because of the tenants to come.
If more traditional tenants, such as law firms, lease large blocks of sustainable space in the Pearl (witness Ater Wynne’s 27,681-square-foot lease at The Lovejoy last quarter), then the Sunset Corridor’s tech- and energy-heavy gang will definitely present a demand for LEED certification. Oregon currently has the country’s biggest market for solar-powered industry with six solar equipment manufacturing companies already calling Oregon home. There’s no shortage of interest from wind- and wave-powered energy companies as well, while the state’s software industry is now the eighth largest in the nation in terms of total jobs. There is no question that all of these users will demand a sustainable working environment.
Congress is expected to renew the Federal Investment Tax Credit of 30 percent in early 2009, and Oregon’s Business Energy Tax Credit covers up to 50 percent of the cost of an alternative energy project. The Energy Trust of Oregon also offers cash incentives, and Hillsboro’s Enterprise Zones are stimulating alternative energy and other business. Entrepreneurs in alternative energy have no shortage of incentives to take advantage of.
A study by the economic development group Greenlight Greater Portland found that venture capital dollars invested in alternative energy grew 260 percent nationally over the past five years. This number hit home when a recent photovoltaic trade show in Germany had European suppliers and manufacturers clamoring for information from Oregon representatives – the only U.S. state to make an appearance.
A high-profile inhabitant of the Silicon Forest is SolarWorld, the German photovoltaics facility that renovated the former Komatsu silicon plant with a $40 million investment in 2006. The company currently employs 100, will employ 350 by the end of the year, and aims to employ 2,000 at full tilt. The company’s investment in Hillsboro was spotlighted by Site Selection Magazine’s May 2008 issue as a top-10 site-selection deal in North America based on factors including investment, creativity in negotiations, incentives and speed to market. SolarWorld could be the Intel of the next generation, attracting crowds of cottage industry tenants.
Even Beaverton-loyal company Nike made its first foray into Hillsboro with a 75,000-square-foot office lease earlier this year.
One of the attractions to Hillsboro is that it offers some of the most affordable rental rates for office, flex and industrial users. Rates are more appealing than the Corridor’s suburban counterparts.
If those large blocks of space are not enough, one- to 50-acre sites may encourage a user to exercise a build-to-suit option. Biotech company Genentech did just that by purchasing 75 acres and building its first “finish-and-fill” facility in Hillsboro for a state-of-the-art warehouse and distribution center. For new development, the Sunset Corridor has some of the most affordable and accessible land on the west side of the Willamette River relative to other submarkets with comparable demographics and critical mass. Lower land prices balance out the higher up-front cost of sustainable construction.
Furthermore, the City of Hillsboro Economic Development Department offers a three- to five-year property tax exemption on any new development in its Enterprise Zones, which grew by 1,000 acres in early May. The exemption comes with a few requirements, one being a minimum $1 million investment to build in the north industrial area, but only a $250,000 minimum if the development is located in the central or south industrial areas. The Hillsboro Chamber of Commerce prioritizes business development with cooperative city government departments and a “one stop” permitting process, a Department staffer confirmed.
Insiders say further enterprise zone expansions could be on the horizon.
Bottom line: the “location, location, location” mantra of real estate seekers has been replaced by a “location, economics, social responsibility” trinity of requirements. As the future unfolds, it may actually prove that sustainable participation attracts better employees.
Savvy business owners and decision makers already know that social responsibility has its benefits: long-term occupancy, lower energy costs, effective recruiting, healthier employees and low attrition. The crossroads of sustainability and productivity yield a greater return on investment; plus it’s simply the right thing to do.
Jeff Borlaug, Vice President, NAI NBS
In the beginning, there was Intel.
In the 1970s, the world’s largest semiconductor company chose Hillsboro as the site for its first plant outside California. Spin-off companies from locally-owned Tektronix shared the area, known as the Sunset Corridor after Highway 26. In the 1980s came Japanese-owned manufacturing companies. They, in turn, begat suppliers and customers of these leading companies, attracting industry clusters in software, communication devices, internet providers and manufacturing.
The Silicon Forest became known as the land of opportunity as the dot-com bubble inflated in the late 1990s, but the proverbial flood came with the dot-com burst of 2001. In regard to vacancies, the Sunset Corridor is still on the road to recovery. But the founding fathers of the area have left their stamp – an imprint of innovation, technology, and social consciousness. As such, Hillsboro is ripe to become the next hub for sustainable development in the Portland metropolitan area.
At present, only the Central Business and Pearl Districts have rental rates high enough to justify new construction that meets Leadership in Energy Efficiency Design standards. Kruse Way will be the next to deliver sustainable office space with Kruse Oaks III, estimated to arrive in 2009. Developers hope to obtain a LEED Gold rating, which will fetch rates more than $33 per square foot.
Next up? The Sunset Corridor. Vacancy rates plummeted from 28 percent in the second quarter of 2007 to 17 percent by the first quarter of 2008. As vacancy continues to drop over the next two to five years, developers will begin to build on speculation. Build-to-suit space could happen even sooner, particularly with interest from an out-of-market or new company. Economic motivators have been put in place on federal, state, and local levels.
Sustainable construction is the natural progression for development along the Sunset Corridor due not only to the profile of its past tenants, but also because of the tenants to come.
If more traditional tenants, such as law firms, lease large blocks of sustainable space in the Pearl (witness Ater Wynne’s 27,681-square-foot lease at The Lovejoy last quarter), then the Sunset Corridor’s tech- and energy-heavy gang will definitely present a demand for LEED certification. Oregon currently has the country’s biggest market for solar-powered industry with six solar equipment manufacturing companies already calling Oregon home. There’s no shortage of interest from wind- and wave-powered energy companies as well, while the state’s software industry is now the eighth largest in the nation in terms of total jobs. There is no question that all of these users will demand a sustainable working environment.
Congress is expected to renew the Federal Investment Tax Credit of 30 percent in early 2009, and Oregon’s Business Energy Tax Credit covers up to 50 percent of the cost of an alternative energy project. The Energy Trust of Oregon also offers cash incentives, and Hillsboro’s Enterprise Zones are stimulating alternative energy and other business. Entrepreneurs in alternative energy have no shortage of incentives to take advantage of.
A study by the economic development group Greenlight Greater Portland found that venture capital dollars invested in alternative energy grew 260 percent nationally over the past five years. This number hit home when a recent photovoltaic trade show in Germany had European suppliers and manufacturers clamoring for information from Oregon representatives – the only U.S. state to make an appearance.
A high-profile inhabitant of the Silicon Forest is SolarWorld, the German photovoltaics facility that renovated the former Komatsu silicon plant with a $40 million investment in 2006. The company currently employs 100, will employ 350 by the end of the year, and aims to employ 2,000 at full tilt. The company’s investment in Hillsboro was spotlighted by Site Selection Magazine’s May 2008 issue as a top-10 site-selection deal in North America based on factors including investment, creativity in negotiations, incentives and speed to market. SolarWorld could be the Intel of the next generation, attracting crowds of cottage industry tenants.
Even Beaverton-loyal company Nike made its first foray into Hillsboro with a 75,000-square-foot office lease earlier this year.
One of the attractions to Hillsboro is that it offers some of the most affordable rental rates for office, flex and industrial users. Rates are more appealing than the Corridor’s suburban counterparts.
If those large blocks of space are not enough, one- to 50-acre sites may encourage a user to exercise a build-to-suit option. Biotech company Genentech did just that by purchasing 75 acres and building its first “finish-and-fill” facility in Hillsboro for a state-of-the-art warehouse and distribution center. For new development, the Sunset Corridor has some of the most affordable and accessible land on the west side of the Willamette River relative to other submarkets with comparable demographics and critical mass. Lower land prices balance out the higher up-front cost of sustainable construction.
Furthermore, the City of Hillsboro Economic Development Department offers a three- to five-year property tax exemption on any new development in its Enterprise Zones, which grew by 1,000 acres in early May. The exemption comes with a few requirements, one being a minimum $1 million investment to build in the north industrial area, but only a $250,000 minimum if the development is located in the central or south industrial areas. The Hillsboro Chamber of Commerce prioritizes business development with cooperative city government departments and a “one stop” permitting process, a Department staffer confirmed.
Insiders say further enterprise zone expansions could be on the horizon.
Bottom line: the “location, location, location” mantra of real estate seekers has been replaced by a “location, economics, social responsibility” trinity of requirements. As the future unfolds, it may actually prove that sustainable participation attracts better employees.
Savvy business owners and decision makers already know that social responsibility has its benefits: long-term occupancy, lower energy costs, effective recruiting, healthier employees and low attrition. The crossroads of sustainability and productivity yield a greater return on investment; plus it’s simply the right thing to do.
Commercial Property Investment: Try It
Investors can diversify their portfolios with a little time and effort
Michael Merino, Vice President, NAI NBS
Individual stocks and bonds, mutual funds, precious metals, certificates of deposit and interest bearing checking accounts. Ask the average “investor” where he or she directs investment money and more than likely the answer will include one or more of the vehicles listed above. But is there another option available to an investor who wants to truly diversify his or her portfolio?
Commercial investment real estate may be that option. For the individual willing to put in a little work and research, commercial properties offer a wide range of alternatives. From industrial properties to small multi-family apartment buildings, strip shopping centers to self-storage warehouses, real estate can pay off.
There is a tremendous range of commercial properties available for the small investor to consider. Each type of property presents its own profile of return potential, management, responsibility and, of course, levels of risk. However, a property that is well managed and properly financed can yield significant returns over the long term.
Investors making their first foray into investment real estate should keep the following in mind before closing on a commercial property:
Establish a Realistic Objective – Just as a smart investor would set objectives with stocks and bonds, so should anyone planning to purchase a commercial property. Make sure these goals are defined and attainable.
Because returns on leased commercial properties are not subject to the roller coaster ups and downs of Wall Street, investors should not expect dramatic short-term returns during their ownership. Instead, determine an exit strategy for disposition of the property at a prescribed time, preferably when the property has appreciated in value and market demand is strong.
Identify what type of factors may trigger the sale (retirement, the purchase of a new home, relocation, etc.), and keep in mind the following: real estate – governed in part by the economic principle of supply and demand – is not always a liquid asset. In other words, don’t expect to be able to turn it into cash at a moment’s notice.
Add Sweat Equity – Add to the bottom line by investing personal time in the upkeep and management of the property. General remodeling tasks, minor interior and exterior maintenance, general accounting and other related chores can often be completed by the investor. This helps reduce overhead cost while letting the investor retain more of a “hands-on” property ownership.
Avoid Highly Leveraged Deals – A highly leveraged financing package is one in which a small amount of cash is used to purchase a larger, more expensive property investment. These types of deals can prove extremely risky, because a market fluctuation can outpace potential income. Leave highly leveraged deals to experienced investors.
Start Out Small – Investing in real estate may be more time intensive than investing in stocks. This is why first-time commercial investors are advised to purchase smaller properties, such as a duplex apartment building or single-tenant retail properties. These properties require less initial capital and generally reduce time management commitment, while providing the experience of ownership and prospective financial rewards.
Stay Close to Home – Markets across the nation vary as greatly as the country itself. Neophyte property investors are advised to make that initial plunge into familiar waters. An investor will certainly be more familiar with the particulars of his or her local market, rather than one across a few time zones.
Get Professional Advice – Commercial real estate, like any other long-term investment, presents great opportunity and inherent risk. A commercial specialist experienced in appraisal, brokerage, management, financing and other related areas can prove invaluable to first-time investors in helping to select an appropriate property.
With a trusted advisor, minimize risk and chart a long-term path to success. Select a real estate professional who is educated in dealing with issues that may surface during the anticipated length of time the property will be held. Also, locate an experienced tax advisor who can help explain the liabilities and strategy involving the Capital Hill Cost Allowance.
Lastly, seek legal advice from an attorney who specializes in real estate or "dirt law."
In the last several years there has been a lot of liquidity, or capital, in the marketplace. Right now, financial institutions have tightened their lending requirements, but opportunities are still available in the commercial real estate sector for investors willing to take some risk. This may include bringing more equity to the table. However, with great upheaval comes new opportunity.
Like any speculative venture, investment real estate may not always perform up to short term expectations. Over the long haul, however, a well managed and properly financed piece of commercial property can unquestionably prove to be a solid investment.
Michael Merino, Vice President, NAI NBS
Individual stocks and bonds, mutual funds, precious metals, certificates of deposit and interest bearing checking accounts. Ask the average “investor” where he or she directs investment money and more than likely the answer will include one or more of the vehicles listed above. But is there another option available to an investor who wants to truly diversify his or her portfolio?
Commercial investment real estate may be that option. For the individual willing to put in a little work and research, commercial properties offer a wide range of alternatives. From industrial properties to small multi-family apartment buildings, strip shopping centers to self-storage warehouses, real estate can pay off.
There is a tremendous range of commercial properties available for the small investor to consider. Each type of property presents its own profile of return potential, management, responsibility and, of course, levels of risk. However, a property that is well managed and properly financed can yield significant returns over the long term.
Investors making their first foray into investment real estate should keep the following in mind before closing on a commercial property:
Establish a Realistic Objective – Just as a smart investor would set objectives with stocks and bonds, so should anyone planning to purchase a commercial property. Make sure these goals are defined and attainable.
Because returns on leased commercial properties are not subject to the roller coaster ups and downs of Wall Street, investors should not expect dramatic short-term returns during their ownership. Instead, determine an exit strategy for disposition of the property at a prescribed time, preferably when the property has appreciated in value and market demand is strong.
Identify what type of factors may trigger the sale (retirement, the purchase of a new home, relocation, etc.), and keep in mind the following: real estate – governed in part by the economic principle of supply and demand – is not always a liquid asset. In other words, don’t expect to be able to turn it into cash at a moment’s notice.
Add Sweat Equity – Add to the bottom line by investing personal time in the upkeep and management of the property. General remodeling tasks, minor interior and exterior maintenance, general accounting and other related chores can often be completed by the investor. This helps reduce overhead cost while letting the investor retain more of a “hands-on” property ownership.
Avoid Highly Leveraged Deals – A highly leveraged financing package is one in which a small amount of cash is used to purchase a larger, more expensive property investment. These types of deals can prove extremely risky, because a market fluctuation can outpace potential income. Leave highly leveraged deals to experienced investors.
Start Out Small – Investing in real estate may be more time intensive than investing in stocks. This is why first-time commercial investors are advised to purchase smaller properties, such as a duplex apartment building or single-tenant retail properties. These properties require less initial capital and generally reduce time management commitment, while providing the experience of ownership and prospective financial rewards.
Stay Close to Home – Markets across the nation vary as greatly as the country itself. Neophyte property investors are advised to make that initial plunge into familiar waters. An investor will certainly be more familiar with the particulars of his or her local market, rather than one across a few time zones.
Get Professional Advice – Commercial real estate, like any other long-term investment, presents great opportunity and inherent risk. A commercial specialist experienced in appraisal, brokerage, management, financing and other related areas can prove invaluable to first-time investors in helping to select an appropriate property.
With a trusted advisor, minimize risk and chart a long-term path to success. Select a real estate professional who is educated in dealing with issues that may surface during the anticipated length of time the property will be held. Also, locate an experienced tax advisor who can help explain the liabilities and strategy involving the Capital Hill Cost Allowance.
Lastly, seek legal advice from an attorney who specializes in real estate or "dirt law."
In the last several years there has been a lot of liquidity, or capital, in the marketplace. Right now, financial institutions have tightened their lending requirements, but opportunities are still available in the commercial real estate sector for investors willing to take some risk. This may include bringing more equity to the table. However, with great upheaval comes new opportunity.
Like any speculative venture, investment real estate may not always perform up to short term expectations. Over the long haul, however, a well managed and properly financed piece of commercial property can unquestionably prove to be a solid investment.
Portland Multifamily Market Stays Strong
Amid housing 'crisis,' demand for local apartments should continue to flourish
Robert Black, Associate Vice President, NAI NBS
In Portland, during early 2007, rampant conversion of multifamily properties to condo development had been sucking apartment product out of the market for at least five years. Vacancy was low, rents were climbing steadily, investor interest was high and, right around the second quarter, a burst of new development brought the promise of much-needed supply.
Then, just as it was starting to become clear that Portland’s seemingly endless in-migration of young creatives might be financially flummoxed by housing prices, the subprime lending crisis hit and the national housing market was poised to crash. Condo development froze. The conversion tables turned and, to date, a total of three downtown condo developments have changed into multifamily properties. If thirty-somethings were already on the fence about home buying, the housing crisis has sealed the deal.
Statistics back this up. Home-ownership rates in the Portland metro area dropped two percentage points in 2007 to 66 percent, but the state’s population rose by 1.6 percent. As a result, multifamily landlords are enjoying high demand, low supply and the opportunity to raise rents as much as 10 percent between tenants. Concessions to renters, such as allowing pets or offering move-in incentives, are going by the wayside in favor of having tenants shoulder partial utilities costs.
It’s a far cry from a city like Phoenix, where vacancy is approximately 10 percent, compared to Portland metro’s 3.8 percent. Due to Arizona’s crackdown on employers’ accountability for hiring undocumented workers, a significant part of that city’s apartment-renting population has fled. In Portland, we have the opposite.
All of that said, it’s easy to lose sight of how comparatively good our housing market is in the Pacific Northwest. Oregon has a markedly lower percentage of subprime loans than the national average. Portland is one of only three cities in the nation where home values held well into the mortgage fiasco and have only come down slightly since last summer, having been flat throughout the first quarter of 2008.
On The Up-and-Up
Why is that? Our financial integrity is owed in large part to the quality of Portland’s lending and appraisal community, and our small-town feel. Our lending and appraisal community, by maintaining a gold standard of reliability, has reduced our exposure to the kind of fraud other markets have experienced. We are finding out that in other markets appraisers, working in collusion with mortgage bankers, inflate values for deal volume with higher commissions and higher interest rates at the expense of not just unqualified borrowers, but eventually, taxpayers.
In the southwestern United States and parts of California, a high-transient business population makes it possible for bad deals to not stick to the offending company’s name. In markets even slightly larger than Portland, business people behind less than desirable transactions have enough anonymity to slip by. In Portland, there is still the mentality that if you want to keep doing business in this town, you have to do good business.
Media Influence
Now we have a media circus trumpeting catastrophe around the credit crunch and impending recession. We read threatening headlines every day. Many industry leaders are saying it’s time to ignore gloomy headlines and get back to work. There are have several good reasons to do so.
Portland’s diversified economy is broad-based, with the trade, transport and utilities sector as the state’s largest employer. We’re also strong in distribution, wholesale and retail trade, regional government and business services. Portland’s secret weapon, within the current climate, gives us a definite advantage: manufacturing is the third largest labor sector in the Portland metro area. We are also strong in the high-tech labor market and the nation’s third largest producer of semiconductors. Shops in Swan Island, Rivergate and the eastside industrial district show no signs of slowing. With the dollar weak, exports are strong – keeping our manufacturing and trade markets afloat.
What Does It All Mean for Multifamily?
Still cautious, lenders are now underwriting more aggressively, requiring more and more detailed reports. Lenders and, in turn, borrowers, are under more scrutiny than ever. However, investor interest in the Portland market is high and the housing crash reinforces multifamily as the product type of the moment. Capitalization rates still aren’t under too much pressure to increase.
For the remainder of 2008, expect to see a higher-than-average volume of institutional transactions like BPG Properties’ $260 million acquisition of Boston Capital Real Estate Investment Trust and the $55 million sale of Hedges Creek in Tualatin. Midsize and entrepreneurial deals will keeping a lower profile.
Nationally, everyone wants and expects a deal on a house. But the subprime slide was so quick, sellers haven’t yet had a chance to absorb how little their houses are now worth. As a result, a wide gap between ‘bid’ and ‘ask’ may keep many prospective homebuyers in the multifamily market for months to come.
Wednesday, October 1, 2008
Freeway Access Key to Wilsonville’s Promise
Development of Coffee Creek industrial area will require funding for infrastructure
Ken Boyko, Vice President, and Ross Connor, Real Estate Broker, NAI NBS
South of the 205 and nestled against the West Coast’s Interstate 5 jugular vein, the City of Wilsonville has been a strong market for industrial real estate since the late 1980s. Prior to that, Tigard was the furthest south most industrial clients felt they could go to service the Portland region. Once Interstate 205 opened up in the early 1980s, Wilsonville’s star began to rise as a thriving area for business growth and is now home to Xerox, Mentor Graphics, Hollywood Entertainment, Flir, Rite Aid, Owens & Minor and several manufacturing and distribution businesses.
A Little History
As the Silicon Forest began to take root throughout Hillsboro in the mid 1980s, corporate headquarters and distribution companies began to locate in Wilsonville. Hillman Corporation laid the groundwork for a thriving commercial center when it built the Wilsonville Business Center in 1985. Nike put in a 500-thousand-square-foot distribution center next door shortly after, and other companies followed suit.
By the late 1980s, Burns Western Corporation was the primary landowner at the North Wilsonville I-5 interchange. As interest developed, Burns Western sold land to companies like Cisco and Smith’s Home Furnishings (whose property later became the headquarters for Hollywood Entertainment). However, it wasn’t until Xerox bought the color printing and imaging division of Beaverton’s Tektronix Inc. for $925 million, and set up shop in its Wilsonville campus, that the area gained notoriety.
Why Wilsonville?
What’s the appeal? With over three miles of freeway land encompassing the confluence of I-205 and I-5, easy access to these freeways puts distribution companies in an ideal position for transportation options. There are few points in the metropolitan area affording distribution to both sides of the river with relative ease, and Wilsonville is perched at the nexus of multiple route options. Once decision makers realized what a growth mode the city of Portland was seeing, Wilsonville’s additional 10-mile journey was small potatoes. A highly educated labor force, excellent public schools, the close-knit community with a small town environment, and high quality of life serve as additional attractions to the area.
Where We’re At
Recent trends have shown low vacancy for the area, increasing its desirability. In the Fourth Quarter of 2005, NAI Norris, Beggs & Simpson’s Quarterly Report numbers showed the Wilsonville submarket’s vacancy at 7 percent. It had squeezed to 6.9 percent a year later and, by the fourth quarter of 2007, was whittled down to 6.28 percent. These figures represent a total of more than 846,600 square feet of net absorption in the past three years. In late 2007, Weston Investment Company took advantage of these encouraging trends and purchased the Parkway Industrial Building for $11.3 million.
Local companies continue to inject money into their current operations. In early December of 2007, Xerox announced it would drop $24 million into an expansion of the company’s Wilsonville manufacturing operations. The improved facility represents one of the corporation’s most important growth strategies, as the expansion will allow for 10 times the current production of solid ink.
Rates, in turn, have increased, partially due to the submarket’s generous freeway visibility. While owners believe this to be a significant (and profitable) value-add, distribution centers don’t need this kind of exposure. Putting too much of a premium on freeway-visibility properties actually reduces the field of prospects.
Another complicating factor in rate determination is that property owners right now have unrealistic expectations about what their land is worth. This is due to a lack of knowledge about what development actually costs. Land and construction costs are at historical highs, and the “going rate” for leaseable space has not yet caught up to justify this investment for developers.
Looking Ahead
As for the future of this area, there is more land proposed to open up in Wilsonville – all 370 acres of it zoned industrial.
This land, known as the Coffee Creek industrial area, is an undeveloped site west of I-5 and south of Day Road. Although the master plan for the area has been approved by the city of Wilsonville, barriers remain to development. The most prominent question is city infrastructure – such as roads, sewer systems, and water lines – and who will pay for it.
Another major issue is the routing of a connector between Highway 99 and I-5. The cities of Tualatin and Sherwood advocate such a connector, but the city of Wilsonville believes that this will funnel traffic pressure into the north Wilsonville I-5 interchange.
The city of Wilsonville contends that if Coffee Creek developers want to build up the area, they must either assume public utility costs up front or raise funding through the formation of a local improvement district – which would pay off improvements over time through taxation of residents. This process may take two or three years to come to fruition.
If the Portland metro area intends to accomplish further growth in the next 10 years, it is imperative that new development take place. Since most Wilsonville owners are not bound by any specific timeframe, they can sit on their land until they get a price they like. As a result, developers will be faced with taking on a significant amount of risk if they want to purchase and develop land, either out of pocket or through civic funding. Until rental rates rise to justify the cost of new construction, or landowners become more motivated to sell, development will be stymied.
Ken Boyko, Vice President, and Ross Connor, Real Estate Broker, NAI NBS
South of the 205 and nestled against the West Coast’s Interstate 5 jugular vein, the City of Wilsonville has been a strong market for industrial real estate since the late 1980s. Prior to that, Tigard was the furthest south most industrial clients felt they could go to service the Portland region. Once Interstate 205 opened up in the early 1980s, Wilsonville’s star began to rise as a thriving area for business growth and is now home to Xerox, Mentor Graphics, Hollywood Entertainment, Flir, Rite Aid, Owens & Minor and several manufacturing and distribution businesses.
A Little History
As the Silicon Forest began to take root throughout Hillsboro in the mid 1980s, corporate headquarters and distribution companies began to locate in Wilsonville. Hillman Corporation laid the groundwork for a thriving commercial center when it built the Wilsonville Business Center in 1985. Nike put in a 500-thousand-square-foot distribution center next door shortly after, and other companies followed suit.
By the late 1980s, Burns Western Corporation was the primary landowner at the North Wilsonville I-5 interchange. As interest developed, Burns Western sold land to companies like Cisco and Smith’s Home Furnishings (whose property later became the headquarters for Hollywood Entertainment). However, it wasn’t until Xerox bought the color printing and imaging division of Beaverton’s Tektronix Inc. for $925 million, and set up shop in its Wilsonville campus, that the area gained notoriety.
Why Wilsonville?
What’s the appeal? With over three miles of freeway land encompassing the confluence of I-205 and I-5, easy access to these freeways puts distribution companies in an ideal position for transportation options. There are few points in the metropolitan area affording distribution to both sides of the river with relative ease, and Wilsonville is perched at the nexus of multiple route options. Once decision makers realized what a growth mode the city of Portland was seeing, Wilsonville’s additional 10-mile journey was small potatoes. A highly educated labor force, excellent public schools, the close-knit community with a small town environment, and high quality of life serve as additional attractions to the area.
Where We’re At
Recent trends have shown low vacancy for the area, increasing its desirability. In the Fourth Quarter of 2005, NAI Norris, Beggs & Simpson’s Quarterly Report numbers showed the Wilsonville submarket’s vacancy at 7 percent. It had squeezed to 6.9 percent a year later and, by the fourth quarter of 2007, was whittled down to 6.28 percent. These figures represent a total of more than 846,600 square feet of net absorption in the past three years. In late 2007, Weston Investment Company took advantage of these encouraging trends and purchased the Parkway Industrial Building for $11.3 million.
Local companies continue to inject money into their current operations. In early December of 2007, Xerox announced it would drop $24 million into an expansion of the company’s Wilsonville manufacturing operations. The improved facility represents one of the corporation’s most important growth strategies, as the expansion will allow for 10 times the current production of solid ink.
Rates, in turn, have increased, partially due to the submarket’s generous freeway visibility. While owners believe this to be a significant (and profitable) value-add, distribution centers don’t need this kind of exposure. Putting too much of a premium on freeway-visibility properties actually reduces the field of prospects.
Another complicating factor in rate determination is that property owners right now have unrealistic expectations about what their land is worth. This is due to a lack of knowledge about what development actually costs. Land and construction costs are at historical highs, and the “going rate” for leaseable space has not yet caught up to justify this investment for developers.
Looking Ahead
As for the future of this area, there is more land proposed to open up in Wilsonville – all 370 acres of it zoned industrial.
This land, known as the Coffee Creek industrial area, is an undeveloped site west of I-5 and south of Day Road. Although the master plan for the area has been approved by the city of Wilsonville, barriers remain to development. The most prominent question is city infrastructure – such as roads, sewer systems, and water lines – and who will pay for it.
Another major issue is the routing of a connector between Highway 99 and I-5. The cities of Tualatin and Sherwood advocate such a connector, but the city of Wilsonville believes that this will funnel traffic pressure into the north Wilsonville I-5 interchange.
The city of Wilsonville contends that if Coffee Creek developers want to build up the area, they must either assume public utility costs up front or raise funding through the formation of a local improvement district – which would pay off improvements over time through taxation of residents. This process may take two or three years to come to fruition.
If the Portland metro area intends to accomplish further growth in the next 10 years, it is imperative that new development take place. Since most Wilsonville owners are not bound by any specific timeframe, they can sit on their land until they get a price they like. As a result, developers will be faced with taking on a significant amount of risk if they want to purchase and develop land, either out of pocket or through civic funding. Until rental rates rise to justify the cost of new construction, or landowners become more motivated to sell, development will be stymied.
To Lease or To Own, That is the Question
Entrepreneurs facing a lease vs. own decision need to take a long-range outlook
Michael Merino, Vice President, NAI NBS
Fledgling entrepreneurs – owners of accounting firms, machine shops, print shops, distribution companies, dry cleaning establishments or any other small businesses – face the question of whether to lease or own the property housing their business.
Unfortunately for those seeking a quick fix, there is no “right” or “wrong” answer. A variety of factors pertinent to the individual business and the owner’s objectives, as well as local market factors, must be taken into account before an informed decision can be made.
The company’s potential for growth and future sustainability are two of the principal factors influencing the lease-versus-own decision. If the business is expected to grow dramatically over the next three to five years, owning is probably not a good option.
By leasing, the entrepreneur avoids the prospect of purchasing a building that is too large and finding himself stuck with (costly) empty space. Alternately, the business may stumble by purchasing a building that only accommodates current space needs, which will be too small in a few years.
Availability of flexible lease terms is critical to an optimal leasing situation. Landlords in many markets offer a long-term lease of five to 10 years, with a clause allowing the business to exit the lease after five years with six months notice. In this case, the tenant would pay the unamortized or remaining landlord costs of tenant improvements, brokerage commissions and fees before leaving the property. For example, if the landlord financed some specialty improvements on behalf of the tenant and the tenant exercised its option to terminate, then the landlord, per the terms of the lease, would re-coup the remaining amount in one lump sum. This lump sum would also include brokerage commission and most likely a termination fee.
That said, leasing as opposed to owning real estate does offer a business the option to occupy a property while utilizing capital in other ways – if the lease has proper flexibility and provisions for the tenant.
Leases should provide the tenant with an acceptable level of control over the asset. These control issues include assignability (the ability to assign lease or responsibility to another party if the tenant decides to leave), reasonable condemnation (not having to pay if the building is untenantable for any reason), and purchase options (which give the tenant the option to purchase the building at a pre-negotiated timeframe and/or price). Lease rate escalation clauses should be manageable and ideally tied to sales growth in order to lessen downside risk.
With regard to ownership, tying up valuable capital in real estate assets can be a drain on small business owners who are focused on making payroll. Leases tend to lower utilities and maintenance costs, where a tenant is paying its pro-rata share in a multi-tenanted building, versus shouldering all of the cost in a freestanding building.
An outright purchase of a business property would best be considered by an entrepreneur who has been in business for a few years with concrete projections to grow the business significantly. If a business owner knows he or she can manage the company effectively in the same building for 10 years or longer without requiring additional space, then he or she should take a hard look at the cost of differences between leasing and owning.
However, even ownership has its pitfalls. If you purchase the property and 10 years in the future the business gets into financial difficulties, you as the owner do not have the flexibility a lease would offer. If you file for bankruptcy as a tenant, you’re likely to tear up the lease and claim you need to move to a lower-cost building in order to get back on your feet. An owner simply does not have that flexibility. Another problem with ownership is that it carries a potential “opportunity cost” of tying up capital that might otherwise be invested in the business’s expansion or renovation.
The main question to consider is, will your business make more money out of putting money into the business or into real estate assets? Even large, successful companies choose to lease because they can be more profitable putting money into their business; others may not want the responsibility of property stewardship.
If an entrepreneur opts to purchase, determining when to make that purchase is paramount to getting the best price. Analyzing current market conditions and available sales comparable information provides the buyer with valuable insight. Sales comparables show buyers what to expect by compiling examples of comparable sales, which are similar either by location or by property type. A broker who can analyze regional markets, how varying property types are performing in those markets and the rents these assets can capture helps to quantify and compare options. The CCIM/Landauer Investment Trends Quarterly, an analysis of transaction data, is an excellent source of regional market data.
Whether the entrepreneur opts to lease or own, he or she would be well served to get a realistic analysis of the business’s growth potential, and compare costs with trusted advisors.
Michael Merino, Vice President, NAI NBS
Fledgling entrepreneurs – owners of accounting firms, machine shops, print shops, distribution companies, dry cleaning establishments or any other small businesses – face the question of whether to lease or own the property housing their business.
Unfortunately for those seeking a quick fix, there is no “right” or “wrong” answer. A variety of factors pertinent to the individual business and the owner’s objectives, as well as local market factors, must be taken into account before an informed decision can be made.
The company’s potential for growth and future sustainability are two of the principal factors influencing the lease-versus-own decision. If the business is expected to grow dramatically over the next three to five years, owning is probably not a good option.
By leasing, the entrepreneur avoids the prospect of purchasing a building that is too large and finding himself stuck with (costly) empty space. Alternately, the business may stumble by purchasing a building that only accommodates current space needs, which will be too small in a few years.
Availability of flexible lease terms is critical to an optimal leasing situation. Landlords in many markets offer a long-term lease of five to 10 years, with a clause allowing the business to exit the lease after five years with six months notice. In this case, the tenant would pay the unamortized or remaining landlord costs of tenant improvements, brokerage commissions and fees before leaving the property. For example, if the landlord financed some specialty improvements on behalf of the tenant and the tenant exercised its option to terminate, then the landlord, per the terms of the lease, would re-coup the remaining amount in one lump sum. This lump sum would also include brokerage commission and most likely a termination fee.
That said, leasing as opposed to owning real estate does offer a business the option to occupy a property while utilizing capital in other ways – if the lease has proper flexibility and provisions for the tenant.
Leases should provide the tenant with an acceptable level of control over the asset. These control issues include assignability (the ability to assign lease or responsibility to another party if the tenant decides to leave), reasonable condemnation (not having to pay if the building is untenantable for any reason), and purchase options (which give the tenant the option to purchase the building at a pre-negotiated timeframe and/or price). Lease rate escalation clauses should be manageable and ideally tied to sales growth in order to lessen downside risk.
With regard to ownership, tying up valuable capital in real estate assets can be a drain on small business owners who are focused on making payroll. Leases tend to lower utilities and maintenance costs, where a tenant is paying its pro-rata share in a multi-tenanted building, versus shouldering all of the cost in a freestanding building.
An outright purchase of a business property would best be considered by an entrepreneur who has been in business for a few years with concrete projections to grow the business significantly. If a business owner knows he or she can manage the company effectively in the same building for 10 years or longer without requiring additional space, then he or she should take a hard look at the cost of differences between leasing and owning.
However, even ownership has its pitfalls. If you purchase the property and 10 years in the future the business gets into financial difficulties, you as the owner do not have the flexibility a lease would offer. If you file for bankruptcy as a tenant, you’re likely to tear up the lease and claim you need to move to a lower-cost building in order to get back on your feet. An owner simply does not have that flexibility. Another problem with ownership is that it carries a potential “opportunity cost” of tying up capital that might otherwise be invested in the business’s expansion or renovation.
The main question to consider is, will your business make more money out of putting money into the business or into real estate assets? Even large, successful companies choose to lease because they can be more profitable putting money into their business; others may not want the responsibility of property stewardship.
If an entrepreneur opts to purchase, determining when to make that purchase is paramount to getting the best price. Analyzing current market conditions and available sales comparable information provides the buyer with valuable insight. Sales comparables show buyers what to expect by compiling examples of comparable sales, which are similar either by location or by property type. A broker who can analyze regional markets, how varying property types are performing in those markets and the rents these assets can capture helps to quantify and compare options. The CCIM/Landauer Investment Trends Quarterly, an analysis of transaction data, is an excellent source of regional market data.
Whether the entrepreneur opts to lease or own, he or she would be well served to get a realistic analysis of the business’s growth potential, and compare costs with trusted advisors.
Demand Presently Trumping Supply
Industrial land development: What is the situation along the I-205 corridor?
Tom Dechenne, Associate Vice President, NAI NBS
Many industrial land users face a quandary when searching for developable land in the Interstate 205 Corridor. Land is in short supply and various factors impact how it can be developed, leading to a crowded outlook at present and in the future.
The I-205 Industrial Corridor is generally considered to be the area along the I-205 freeway from the Columbia River south to Oregon City. The primary areas of most dense industrial development are the Airport Way/Columbia Boulevard area, and the Clackamas/Milwaukie area.
Supply and Demand
The age-old economic axiom of supply versus demand plays a central role in price determination, particularly as available land supply continues to diminish. When the Urban Growth Boundary was first enacted in the 1970s, industrial land was abundant. Through the economic downturn of the 1980s, the Portland Metropolitan area still had plenty available. However, beginning in the 1990s, ready-to-develop parcels have become exceedingly difficult to find, particularly 5 to 10 acres or larger, not only in the I-205 Corridor, but throughout the Portland Metropolitan region.
Numerous vacant land inventory studies have been performed over the past several years. The major challenge in trying to determine inventory is to determine what is, and/or what could be, available for development. Only recently has the estimated amount of vacant developable land become somewhat closer to the actual amount. Major land-use decisions have often missed the realistic calculation of inventory supply. Just because a parcel of land is unimproved without buildings does not mean the present owner, or a future owner, will develop or sell it.
Another aspect of potential available land is its development potential. Major factors such as topography, wetlands, and access to major and secondary freight corridors greatly affect whether a parcel can be developed at an economical cost. For instance, a 5-acre parcel might be identified as available. However, if any of the above factors limit or realistically prevent it from being developed, that parcel is, for all practical purposes, not available.
In today’s market, continuing strong demand over the past several years far outstrips the supply. For example, within two miles of I-205 (west or east), about 200 acres of privately held land appear to be available. While the majority of that land is currently not available, less than half is realistically developable due to wetlands, steep slopes or other limiting factors. The one significant land area that could be available for industrial development is the Port of Portland-owned property on the west side of I-205, near Airport Way.
As a result of these factors, it is difficult for an industrial user to find a vacant parcel. If found, development costs – such as dealing with slopes, wetlands mitigation and access roads – are prohibitive. For those few properties available, the limited supply drives up the price of the land. Due to short supply and continuing strong demand, prices range from $8 to $15 per square foot – in essence, double the value from a few years ago.
Future Growth Area
Areas of future growth exist where industrial land will be serviced with infrastructure, namely sewer, water and roads, but these are farther from I-205. Most notably, the Happy Valley/Damascus area is anticipated to add 200 to 300 acres of industrial land. It will be some years before the majority of these lands are ready for development. The present value of such land is discounted due to unknown time frames and lack of infrastructure, yet it is selling for $5 to $6 per square foot.
Type of Industrial Use
Another factor affecting industrial land is the type of use. Industrial buildings and property designed for warehouse distribution is much more sensitive to transportation infrastructure. Major distributors will not consider properties too far (i.e., four to five miles) from the I-205 freeway or its major feeders. Manufacturing users, while less dependent on highway infrastructure, require proportionately more land for parking, outside assembly, outside storage and related uses. Within the marketplace, the average user is in the 10,000- to 20,000-square-foot range, with a combination of distribution and manufacturing/assembly uses.
Future Trends
Given this limited supply, more in-fill redevelopment will likely occur. Of course, the cost of demolishing slightly dysfunctional buildings (i.e., those with low ceilings, unusable configuration, and multistory warehouses) has traditionally exceeded the cost of purchasing raw land. As available parcels become fewer and redevelopment is the only possibility, the net land cost will continue spiraling upward, despite the perception of today’s “softness” in the land market.
Perhaps the biggest challenges for future industrial growth and development along the I-205 Corridor will be funding for transportation infrastructure. This is no more evident than the future Sunrise Corridor plans to open the area east of I-205 in Clackamas. The plans call for an extension of Highway 224 north of Highway 212 and east of I-205. The other challenge will be to maintain present industrial areas as sanctuaries.
Compatibility
A less noticeable factor is the compatibility issue. Distribution centers and manufacturing facilities with noise from machinery, trucks, and railroads, such as those in Clackamas, Milwaukie and the Columbia corridor areas near I-205, are absolutely incompatible with residential neighborhoods.
Maintaining present uses, whether heavier industrial or more compatible light industrial/service uses, within mixed-use residential neighborhoods is critical. Therefore, it becomes imperative to maintain these industrial areas if, as a region, we expect growth to be in balance with a variety of employment within each of the various submarkets.
Tom Dechenne, Associate Vice President, NAI NBS
Many industrial land users face a quandary when searching for developable land in the Interstate 205 Corridor. Land is in short supply and various factors impact how it can be developed, leading to a crowded outlook at present and in the future.
The I-205 Industrial Corridor is generally considered to be the area along the I-205 freeway from the Columbia River south to Oregon City. The primary areas of most dense industrial development are the Airport Way/Columbia Boulevard area, and the Clackamas/Milwaukie area.
Supply and Demand
The age-old economic axiom of supply versus demand plays a central role in price determination, particularly as available land supply continues to diminish. When the Urban Growth Boundary was first enacted in the 1970s, industrial land was abundant. Through the economic downturn of the 1980s, the Portland Metropolitan area still had plenty available. However, beginning in the 1990s, ready-to-develop parcels have become exceedingly difficult to find, particularly 5 to 10 acres or larger, not only in the I-205 Corridor, but throughout the Portland Metropolitan region.
Numerous vacant land inventory studies have been performed over the past several years. The major challenge in trying to determine inventory is to determine what is, and/or what could be, available for development. Only recently has the estimated amount of vacant developable land become somewhat closer to the actual amount. Major land-use decisions have often missed the realistic calculation of inventory supply. Just because a parcel of land is unimproved without buildings does not mean the present owner, or a future owner, will develop or sell it.
Another aspect of potential available land is its development potential. Major factors such as topography, wetlands, and access to major and secondary freight corridors greatly affect whether a parcel can be developed at an economical cost. For instance, a 5-acre parcel might be identified as available. However, if any of the above factors limit or realistically prevent it from being developed, that parcel is, for all practical purposes, not available.
In today’s market, continuing strong demand over the past several years far outstrips the supply. For example, within two miles of I-205 (west or east), about 200 acres of privately held land appear to be available. While the majority of that land is currently not available, less than half is realistically developable due to wetlands, steep slopes or other limiting factors. The one significant land area that could be available for industrial development is the Port of Portland-owned property on the west side of I-205, near Airport Way.
As a result of these factors, it is difficult for an industrial user to find a vacant parcel. If found, development costs – such as dealing with slopes, wetlands mitigation and access roads – are prohibitive. For those few properties available, the limited supply drives up the price of the land. Due to short supply and continuing strong demand, prices range from $8 to $15 per square foot – in essence, double the value from a few years ago.
Future Growth Area
Areas of future growth exist where industrial land will be serviced with infrastructure, namely sewer, water and roads, but these are farther from I-205. Most notably, the Happy Valley/Damascus area is anticipated to add 200 to 300 acres of industrial land. It will be some years before the majority of these lands are ready for development. The present value of such land is discounted due to unknown time frames and lack of infrastructure, yet it is selling for $5 to $6 per square foot.
Type of Industrial Use
Another factor affecting industrial land is the type of use. Industrial buildings and property designed for warehouse distribution is much more sensitive to transportation infrastructure. Major distributors will not consider properties too far (i.e., four to five miles) from the I-205 freeway or its major feeders. Manufacturing users, while less dependent on highway infrastructure, require proportionately more land for parking, outside assembly, outside storage and related uses. Within the marketplace, the average user is in the 10,000- to 20,000-square-foot range, with a combination of distribution and manufacturing/assembly uses.
Future Trends
Given this limited supply, more in-fill redevelopment will likely occur. Of course, the cost of demolishing slightly dysfunctional buildings (i.e., those with low ceilings, unusable configuration, and multistory warehouses) has traditionally exceeded the cost of purchasing raw land. As available parcels become fewer and redevelopment is the only possibility, the net land cost will continue spiraling upward, despite the perception of today’s “softness” in the land market.
Perhaps the biggest challenges for future industrial growth and development along the I-205 Corridor will be funding for transportation infrastructure. This is no more evident than the future Sunrise Corridor plans to open the area east of I-205 in Clackamas. The plans call for an extension of Highway 224 north of Highway 212 and east of I-205. The other challenge will be to maintain present industrial areas as sanctuaries.
Compatibility
A less noticeable factor is the compatibility issue. Distribution centers and manufacturing facilities with noise from machinery, trucks, and railroads, such as those in Clackamas, Milwaukie and the Columbia corridor areas near I-205, are absolutely incompatible with residential neighborhoods.
Maintaining present uses, whether heavier industrial or more compatible light industrial/service uses, within mixed-use residential neighborhoods is critical. Therefore, it becomes imperative to maintain these industrial areas if, as a region, we expect growth to be in balance with a variety of employment within each of the various submarkets.
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