Development Prevailing Theme in Commercial Real Estate

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A year ago, I wrote about the increases in lease and occupancy rates leading to an increase in valuation of commercial assets. This was leading us into the next phase of the economic cycle — development. As I look forward, I am confident development will be the prevailing theme in 2016 and the years to come.

The basic building blocks that stimulate commercial development are in place:

Strong residential development
Historically, commercial real estate has lagged growth and decline in residential real estate — as go people, so go the jobs, so goes the demand for commercial real estate. Rental vacancy rates remain historically low.

Notable land sales
Increased listings, and more importantly sales, at higher valuations than we have seen in six or seven years. Investors and developers know Central Oregon needs for office, industrial, and even retail are increasing.

Declining vacancy rates
Across the primary commercial sectors (office, industrial, and retail), there has been a consistent decline
in vacancy.

Delivery of new development remain low in Central Oregon
Simply put, there has been very little new inventory coming into the commercial market. However, we are finally seeing an increase in commercial building permits being issued and all it takes is a short drive before you run across a construction site.

NOTABLE DEVELOPMENTS
While there are plenty of obvious projects coming out of the ground —
OSU Cascades (SW Century and Chandler), Market of Choice (NW Colorado& Lava), and My Place Hotel (SW Bond St in the Old Mill) — there are some new and exciting opportunities due to develop in 2016 and 2017.

One of the most notable commercial developments is the proposed Crane Shed Commons building. With office vacancy rates averaging 7.5 percent, the 50,000 square foot building located on SW Industrial, should provide welcome opportunity for the discerning tenant looking for flexible office and creative space. The building boasts views of the Old Mill, Deschutes River, and the Cascade Mountains.

On the retail front, one of the standout projects is the proposed Third Street Marketplace. This 9,400 square foot strip center is the only new retail development along Hwy 97/Third Street in Bend. A lease has been signed with a national coffee chain leaving approximately 7,400 square feet available for lease. This handsome, well-designed center will hopefully be the beginning of a much-needed facelift for this corridor of Bend.

As our population grows, the need for medical care also increases. St. Charles Health Systems is answering that need with their new development on the south end of Bend near the Bend Factory Outlet stores. The 18,500 square foot building is due to be completed late this year.

Recently, two lots at the Mt. Washington and SW Century Drive roundabout were purchased with the intention of building a Best Western Premier hotel. Being located near the OSU Cascades campus and Mt Bachelor should prove to be a successful combination for visiting parents and winter sports enthusiasts. The owners are planning to break ground in Summer 2017.

As the market continues to improve, there are considerations for every business or individual touched by commercial real estate.

TENANTS
Now is an excellent time to review your lease and to consider your long term plans for your business. With vacancy on a steady decline, lease rates are increasing. Don’t be afraid to contact your Landlord to strategize a plan that works well for both parties.

LANDLORDS
As demand increases it will be tempting not to renew leases for existing Tenants in hopes of realizing a new Tenant that is willing to pay substantially more. If you have quality Tenant, it is important you work with them. Losing a Tenant can mean lost cash flow and new expenses such as tenant build-out allowances and additional brokerage commissions, etc. Consider alternatives like ramping the lease rate over time, providing some enhancements that improve the work environment and/or the appeal of the building to the Tenant’s clients, or a longer-term lease to increase the stabilization and the overall valuation of your asset.

INVESTORS & DEVELOPERS
Critical in an improving market, is to utilize your trusted advisors to collaborate on any proposed project. Leveraging the expertise of your Commercial Real Estate Advisor, CPA, and attorney is an investment that will pay long-term dividends.

Some of the key discussion points in the collaboration should include:

Who is your target market and which Tenants best-fit market demands?

Are there options for conversion of the building as the market changes?

Does the building lack amenities that can add value?

Is there opportunity to manage or market the property in a different way?

Would Cost Segregation offer a dynamic opportunity to accelerate depreciation and recognize improved net operating income and realize lower taxable income, sooner?

Overall, the economic indicators are positive. There is more capital available, real disposable income is rising, net worth rebounding, and interest rates remain low. Invest and operate with reason and sound analysis and the cycles can be enjoyed and endured.

NAI Cascade is a global full service commercial real estate strategies firm. Andie Edmonds is a Partner and Principal Broker with NAI Cascade. Her background in finance and real estate investing provides a unique combination of experience that enables her to offer thorough, on-target services for her clients. With a deep transaction history and a CCIM (Certified Commercial Investment Member) designation, Andie is a recognized expert in the commercial real estate industry. Andie can be reached directly at 541-306-0042 or aedmonds@naicascade.com

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