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Cliff Hockley, CPM
President, Bluestone & Hockley Real Estate Services
Welcome to 2005, the year of the economic turnaround. In a speech delivered in January of 2005, Federal Reserve Bank of Richmond President Jeffrey Lacker said we are “well positioned for fairly healthy economic conditions (over the) next year.” )
According to Kenneth Landon, senior currency strategist at JP Morgan Chase and Co. in New York, the dollar will be moving lower over the course of the next three to six months. 2 This lowering of the dollar gives American companies an ability to better compete in the world market by making US products cheaper abroad. In 2004 manufacturing revived to some extent as “profits and production rose, orders for computer software soared and orders for construction machinery surged more than 30%.” 3
Oregon
The Oregon OEA’s (Office of Economic Analysis) December 2004 Economic Forecast calls for economic recovery to continue over the next few years. They expect job growth to come in at 1.8% in 2004, but that the number of jobs will not reach their prerecession levels until mid 2005. Annual job growth is forecasted to be 2.1 % for 2005 and 1.8% for 2006. 4
William B. Conerly, PhD, a well-respected Oregon economist, discussed the economy in his January economic comments. He reflected the common theme of now that the presidential election is over, businesses are making purchase decisions. He confirmed that export growth was due mostly to the falling dollar. He expects interest rates and the stock market to rise slightly in 2005.
Dr. Conerly sees overall Oregon employment reviving, however in the Portland Metro area, employment remains far below its previous peak and he anticipates no great change. 5 His last reflection is contrary to data collected by the Oregon Employment Department which shows the Portland metro unemployment rate to have fallen from 7.4% in Nov of 2003 to 6.4% in November of 2004. 6 This reinforces the notion that our market is slowly rebounding
What Does this Mean for the Portland Metro Real Estate Investor?
Office
Portland real estate pundits expect to see office vacancies improve incrementally. This change should be led by Class A properties located outside of Multnomah County due to taxes that were imposed on that county two years ago. Office rates will continue to solidify as sublease spaces evaporate from the marketplace and reduce the competition for space. The Sunset corridor should experience some larger transactions as Intel grows their Hillsboro and Beaverton operations, spurring other businesses to locate nearby.
Construction is moving forward in suburban submarkets with particular growth in the Vancouver area along I-5 and I-205. The Central Business District continues to experience a vacancy rate close to 12%. There is demand for the purchase of office buildings with vacancy rates of less than 10%.
Retail
There is tremendous demand by investors for retail buildings. This is exemplified by the January 2005 purchase of the 167,000 square foot Wilsonville Town Center that changed hands for a cool $29.9 million, or $179.04 per square foot. Built in the early 1990s on 21 acres, the Center is anchored by Lambs Thriftway and Rite Aid, both which have been very successful in this location. Vacancy at the Center is under 4%. The selling agent, Lou Lauman of CB Richard Ellis, said this is the first time a grocery/drug-anchored neighborhood shopping center has sold at a sub 7% Cap rate. This is also a reflection of the lease structure used for of most retail buildings in which most of their expenses are passed on to tenants, thereby reducing the risk to building owners. There are not many retail buildings for sale in the Portland Metro area. 7
Industrial
Current vacancy rates for industrial property are estimated to be close to 12 %, or about 10,774,000 vacant square feet of industrial space. Spec development is down significantly; the cost of construction has risen significantly. Low interest rates have motivated many industrial business owners to purchase their own buildings rather than lease. Older buildings with ceiling heights under 15 ft are having a hard time competing with buildings with 30 ft or greater clear heights. With the shift of manufacturing offshore, this means that older buildings will have to either convert to distribution use, or find another way to attract tenants. Lease rates have plummeted in many markets from a posted rate of $0.35 or $0.30 NNN, to $0.25 NNN per foot. If you can find a building with a long term leased tenants in it, this is a good time to buy. There is, however, limited inventory. 8
Apartments
Low interest rates motivated a huge growth in home construction. This construction boom, coupled with slow job growth, has created some of the highest vacancy rates in the rental housing market. But this has not scared away the apartment builders who have constructed an estimated 4000 units in the four county metro area. The prominent reasons for this construction boom are:
- the high level of subsidized units
- low interest rates
- developers who need to keep projects in the pipeline
This boom, fueled by the likes of Hacienda Development and Reach Community Development, not for profit developers of low income housing, has:
- Moved rents to drop to late 1990 levels in response to lack of demand
- Motivated current owners to upgrade their existing units to compete
- Forced owners with high vacancy rates to sell. New buyers are improving the properties to be able to better compete
- Encouraged owners to give up to 2 months in free rent concessions
- Inspired owners to give exiting tenants better treatment
- Put the focus on tenant retention by appreciating tenants, giving specials for lease extensions, making improvements to existing tenants units
With the low interest rates, the cap rates have dropped to the low of 7.3 % which has encouraged a median price per unit of $52,361. This has created a higher level of sales activity in 2004. Even with projected higher interest rates, we expect more transfers of property. 9
Vacancy rates are particularly high in Gresham, Beaverton, Vancouver and Milwaukie.
We expect the vacancy rates to come down as job growth ramps up and interest rates increase.
Homes
At a recent Home Builder Association Forecast, members listened to the following from Michael Carliner, vice president of economics for the national association of homebuilders, Tom Potiowsky, the Oregon State Economist and Jerry Johnson a partner in Portland Based Johnson Gardner.
Johnson predicted a drop of 5-10 % in the number of homes expected to be built in 2005 as compared to 2004 due to creeping interest rate increases and the dwindling land supply. 2004 was a record year and 2005 is expected to remain strong.
Carliner described the national economic picture as fair, with a post recession growth rate that is considered sub par.
Potiowsky predicted a mild growth in income levels with a slight growth in population. He expects employment levels to be good for 2005. 10
Summary
Reflecting upon the views of the pundits, the positive view for 2005 could only be shaken by:
- A significant increase in the cost of oil,
- Local and state government budget short falls due to court adjustments to the Oregon public employee’s retirement system
- Ballot measure 37 increases taxes or cuts budgets to fund court mandated adjustments
- Slower recovery of the tech market
The Legislature is in session. The Governor has proposed a conservative, balanced budget. The future looks good. We expect the real estate investment market to solidify by the end of 2005. The real problem will be finding investments. With clients reticent to sell what they have (because they are making money), many Oregon investors are being forced to look to other states for opportunities.
We cannot forget to mention that California investors have flooded the Oregon market looking for value they cannot find at home. This investment pressure has artificially increased sale prices to some extent, especially in the plex arena. One of our agents sold his duplexes in Gresham last week for a price in excess of $300,000 each.
Welcome to 2005.
(1) USA Today, 1/15/05 “Forecast for 2005: Mostly Clear Skies”
(2) www.bloomberg.com, (1/15/05), “Dollar posts Biggest Weekly Loss Against the Yen Since March 2004”
(3) USA Today, 1/15/05, “Forecast for 2005: Mostly Clear Skies”
(4) Executive Summary of the December 2004 Economic Forecast, prepared by the Oregon Office of Economic Analysis
(5) www.conerlyconsulting.com/charts, “Conerly on the Economy Charts”
(6) www.qualityinfo.org/olmis/regions, Region 2
(7) Brian Miller, www.globestreet.com, Jan 10, 2005
(8) Steve Klein, GVA Kidder Mathews, notes of December 16, 2004 Institute of Real Estate Management (IREM) forecast Breakfast, Portland, OR
(9) Mark Barry, Apartment Appraiser, December 16, 2004, IREM Forecast Breakfast
(10) www.oregonlive.com, Thursday Dec 16, 2004, “Metro Building Outlook: Home Builders Forecast a Strong Year, Though Weaker than 2004”, David Nielsen
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