Portland's Commercial Market: A 2009 Investment Property Update

PDX Broker’s Commercial Insights: Article No. 6

Todd VanDomelen, a Commercial Investment Broker for Norris & Stevens, Inc. sat at the large round conference table in front of his computer. He took in a deep breath and looked up at the audience to whom he was about to present. His task today was to give a market update on the Portland Investment Market, something that nobody in their right mind is currently thrilled to talk about.

Todd broke into it, starting with “One Year Ago” and laid out the events that he attributed to bringing us to our current market climate:

a. August 2008; Oregon officially is declared in a Recession

b. September, 7^th, 2008; Fannie Mae and Freddie Mac are taken over by the Government

c. September, 14^th, 2008; Lehman Brothers collapses and sends shockwaves worldwide

d. September, 15^th, 2008; Bank of America agreed to acquire Merrill Lynch

e. September, 16^th, 2008; The U.S. takes over AIG as part of the $85 Billion ‘Bailout’.

After catching everyone up to date with the brief history lesson of events Todd listed off some facts of “Today”:

a. Portland, Oregon had lost 44,000 jobs in the last year as of July 2009

b. Portland’s unemployment rate appears to be stabilized at 11.3% and Oregon overall at 11.9%

With these two major facts lingering above the crowd, their faces nodding occasionally as this was something they had heard before, Todd explained that Oregon was one of five states slated for a fourth quarter recovery. This information he cited was from Moody’s Economy.com. The other four states mentioned were; Washington, Idaho, Colorado, and Texas. Oregon’s forecasted recovery, Todd noted, has been due to a few key factors. The demand for Oregon’s exports is anticipated to increase. The high-tech sectors, something that Oregon has been heavily courting over the years; computer companies, software designers, solar panel and green energy manufacturers, has been paying off.

According to Oregon’s Labor Market Information System, “While few industries within the State have been spared the job losses brought about by the current economic climate, high-tech service based sectors have enjoyed relative stability and strong prospects.”

As far as sales in 2009 were concerned, Todd expressed that as everyone knows sales have been down compared to previous years. In fact, sales in 2009 were down by 70%. Of the sales that were made, 40% had no Commercial Brokers involved. This fact alone has hit the Commercial Brokerage Community hard. Of the sales made in 2009, 58% of the Industrial, Retail and Office transactions were Owner/User.

The CAP rates for Office Properties ranged from 7.5% to 8%, with medical being desirable. Industrial Properties had CAP rates in the 7% to 8.5%, with few sales being documented. Retail’s CAP rates were in the 7% to 9% and up range, and Multi-Family rates were in the 7% to 7.5% range.

Financing, which has been a big hindrance on sales due to increasingly stringent underwriting efforts and strong qualifications for loan holders to meet, is not getting any worse. It has been very deal dependant and relies on how strong the tenant is. Retail properties have been extremely difficult, since retailers as a whole have been heavily hit. Right now we are seeing 50% to 65% in Loan to Value with rates being at 6% to 7% for ten-year money.

Some additional trends in the Portland Market that Todd noted were;

1. Investors are still waiting for better deals to come their way. This is an increasing problem with sales because the prices people believe their property is worth, and the price investors are willing to pay are still leagues apart.

2. There has been more activity on smaller sales deals under $1 Million. Todd attributed this to these sorts of deals being easier to do because the investor has the cash on hand and doesn’t require, or requires a very minimal loan.

3. There is a continued problem with ‘Big Box’ Shopping Centers, which are also known as Centers with large Anchor Tenant’s, as many of these large anchors are going dark. An example we have seen in our local area is GI Joes closing up shop, leaving the existing in-line retailers to fend for themselves without the additional anchor drawn shopper.

While the Portland Investment Market is looking pretty ‘doom and gloom’ right now, Todd reminded us there is hope on the horizon. With Moody Economy’s report stating Oregon should be one of the first five states to slowly start seeing a rebound, the Investment Market should improve in 2010.

This article is part of the ‘PDX Broker’s Commercial Insights’ series for The Portlander. The column is written by PDX_Broker, a Portlander who works as a Commercial Real Estate Broker in Downtown, Portland. PDX_Broker specializes in Retail Properties and does both Landlord and Tenant representation throughout the Portland Metro and SW Washington areas. She writes frequently about the Commercial Real Estate Industry, Commercial Businesses, and Retail Owners in the Portland area.