Forecast 2019 — Industrial on the Mind

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In April of 2017, I was honored to speak at the Bend Chamber of Commerce Real Estate Forecast Breakfast. I shared that increased building height and an increase in density within all real estate sectors had already begun. I discussed my opinions on the increase in lease rates in the commercial real estate sector and spoke to the increased costs of construction which would limit new commercial development throughout our region. I wrapped up my presentation sharing that rent control would be proposed by municipalities as a way to control increasing lease rates.

Looking back on 2018, the commercial real estate sector in Central Oregon saw sales of general office buildings in Bend at a record high of $300 per square foot. We recorded industrial building sales at a record $165 per square foot which is above the cost of new construction. We absorbed most of the industrial space for lease in Prineville and Sisters, and we closed industrial leases in Redmond at $0.85 per square foot per month triple net when just two years earlier industrial lease rates seldom reached over $0.60 per square foot per month triple net.

Fast forward to 2019. We watch as several proposed multistory developments receive opposition from community members while housing at all levels is in short supply.  And we now read on an almost weekly basis how many cities in Central Oregon are considering options for rent control without considering the long-term economic impact to investors.

Demand from tenants requiring space for lease in the industrial sector is massive. On average our firm receives three calls per day from regional and national tenants looking to lease space in our community. Companies including athletic based firms, food and beverage production companies, pet related businesses, automotive, software development, manufacturing firms and distribution/warehousing companies are all looking to lease space.  Our firm averages two calls a day from cannabis-based companies that want to establish operations specializing in extracting CBD oil from industrial hemp (less than 0.4 percent THC).

Demand from companies wanting to build their own facility is high. Given an 18-24-month timeline for new construction, employers cannot wait this long to establish operations placing an even greater desire to acquire existing buildings.

In Bend we have little move in ready industrial inventory. As of January 24, 2019, there were a total of 13 industrial buildings for lease in Bend for a total 73,500 rentable square feet. To put that in perspective, Bend absorbed over 65,000 RSF of industrial space in the first quarter of 2018. The good news is that there are two industrial projects coming online in Bend this year providing 150,000 rentable square feet for lease.

In Redmond we have very little move in ready inventory with just three industrial buildings for lease totaling 30,000 RSF. There are four new industrial projects coming online in 2019 with just over 120,000 RSF for lease in Redmond. Based on year over year absorption numbers, we feel that there will be a 1-2-year supply of industrial space for lease in Redmond.

In Prineville much of the industrial space has been leased or purchased either by suppliers to Facebook or firms adding a Prineville location. Only two industrial buildings were listed for lease as of January 27, 2019 totaling 15,000 RSF.

Demand for office space in Central Oregon has been increasing and both medical administration and clinical medical space lead the way. Rates in Bend range between $1.45 PSF PM NNN to just over $2.25 PSF PM NNN on a five-year lease term. Redmond follows with average lease rates between $1.25 to $1.65 PSF PM NNN. There is a total of just over 90,000 RSF of move in ready office space for lease in Bend and just over 25,000 RSF for lease in Redmond.

Demand for retail space for lease is good but both Landlords and Tenants are wary of those businesses at risk due to companies like Amazon that offer online sales of the same product. Landlords continue to lease to serviced based providers such as physical therapists, chiropractors, personal care firms, restaurants, cellular and financial advisory firms, fitness-based firms, and retail merchants that carry product lines protected from online sales. There are only two new retail developments proposed in Central Oregon for 2019. Retail based firms wishing to open or add locations in our community must wait for a suite to become vacant or pay a higher than expected lease rate.

Watchlist

  • Be careful of legislation increasing our taxes, controlling our rent, and increasing the cost of construction

–    If the risk is greater than the upside, developers will reconsider the viability of their real estate projects and head to more fertile grounds.

  • Watch the economy specific to California.

–    California represents the majority of transplants to our region.

–    If California stumbles, the stream of people and cash moving into Central Oregon will decline.

Predictions:

  • Demand for commercial space both for lease and for sale will continue into the summer of 2020.
  • Lease rates will continue to rise as construction costs increase.
  • Existing well designed and constructed buildings with excellent location and access will increase in value as owner/users and investors race to obtain their footprint in Central Oregon.
  • Building owners will begin to add in costs for dedicated onsite parking to Tenant’s lease rates.
  • Interest rates and municipal fees will continue to rise challenging new construction.
  • Oregon State University is working on the Innovation District. This area will offer creative options for companies wishing to operate and test their concepts. Watch as this development unfolds over the next twelve months.
  • Opportunity Zones have been identified in many cities in Central Oregon. Investors are waiting on the sidelines ready to acquire property that offers reducing the Buyer’s taxable event and providing incentives for new construction.

Final Comment:

As people continue their migration to Central Oregon, demand increases for housing, commercial buildings, employees, continuing education, childcare, and recreational services. Remember the reasons that brought you to this wonderful community. It is up to the citizens in our community to inform our leaders and planning departments how we want to manage the growth and continue to make Central Oregon an attractive and livable community.

fratzkecommercial.com

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BRIAN E FRATZKE of Fratzke Commercial Real Estate Advisors Inc

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