2021 Economic Outlook

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Forecasting during these politically and socially turbulent times make the proverbial crystal ball murky at best. But the following trends, identified by NAI Cascade Commercial Real Estate and their clients and colleagues, are shooting some light across the Commercial Real Estate bow. The following represents the key trends they have identified for our 2021 Central Oregon Commercial Real Estate Economic Outlook.

  1. The Central Oregon MSAs experiencing a “Zoom Boom.” A “Zoom Town,” the latest pandemic-related lexicon, defines the explosive population growth brought on by in-migration. No longer are employees tied to their work zip codes, and whether hopping in an RV or Sprinter-van, they are making their way rural. 
  2. Central Oregon’s supply of developable land has been a problem since the re-write of the 2020 Urban Growth Boundary (UGB) proposal. As we move further along in our cycle of annexation of county lands into the UGB, the demand from the “Zoom Boom” compresses this timeline even further. 
  3. Additional tax changes are imminent and the unknown of how continued relief will be funded into the future is creating plenty of market uncertainty. In the event programs like the 1031 Exchange are eliminated, it is likely to cause investors to shift towards longer property hold periods, which in turn affects the supply/demand lever.
  4. If the “Roaring 20s” have a financial hangover, it will look much different than recessions past: Bend will remain insulated because of its Zoom Town and tourism boon. 

Zoom Boom. March of 2020 was the month the U.S. stood still. As we all headed to work in front of a computer screen, corporations and employees alike discovered that their “offices” could be anywhere with a high-speed internet connection. Workers flocked to towns with lower living costs, access to outdoor recreation and less dense communities. “Zoom towns” are scattered across the United States, but the most popular ones seem to be small- to mid-sized, amenity-rich communities, with plenty of public land nearby. Places like Bend and Flagstaff, Arizona, for example, top the “best-place-to-live” list. Growing pains are in common amongst these communities, which consistently have populations under 250,000 people and already overheated markets. More buildable land, affordable housing and second-generation inventory is needed to bolster supply. 

Urban Growth Boundary. Developers who used to have hundreds of acres in their inventory are now negotiating on individual lots and looking ahead to what the price tags will be on those larger tracts of land. With discussions of infrastructure in our Urbanizable Area District (UA) zones in their infancy, we are still years out from having the additional built inventory on the books. Municipalities and developers simply must be more nimble and provide faster delivery if they are to keep up with demand. There is relief on the way, but the question remains how much longer we will have to wait. If annexation is the start of having a supply of buildable land, then the follow up questions include: Are there adequate services like sewer, water and streets to these lands? How much time and money will it take before we have sites that are “shovel ready?” And who will pay for all the needed infrastructure? 

Some key development sites to watch:

  • Petrosa by Pahlisch Homes; a master-planned development in NE Bend which will include single-family residential, apartments and supporting commercial, likely a grocery store and boutique shopping similar to Orenco Station in Hillsboro, Oregon. 
  • The SE Elbow of Bend; a 479-acre expansion area, has an annexation hearing planned for March 3. A follow-up two weeks later will precede the review period after which developers can begin planning. This development will include land for an estimated 1,230 homes including ten acres of High Density Residential, 35 acres of Medium Density Residential and 105 acres of Standard Density Residential. It will also include land for future employment, supporting an estimated 2,800 jobs. This area includes Caldera High School and land for a new elementary school. 
  • Private investors acquired 382 acres of land from the State of Oregon in the SE Bend area on Stevens Road. This master-planned development, dubbed Stevens Ranch, hit the mark for the developers; Bend is leading the nation in GDP growth, new businesses, venture capital investments and population growth.
  • The Third Street corridor is seeing some commercial development supported by the Bend Central District (BCD) Initiative (bcdinitiative.org). This initiative leverages $4 in private investment funds for every $1 in public funding to increase infrastructure, connectivity, affordable housing and open space facilities in this urban renewal area. Current projects include 3rd Street Marketplace on the corner of Third and Lafayette, a retail development anchored by Starbucks and Les Schwab’s relocation from NE Franklin to the city block on Third between Clay and Burnside. Les Schwab’s flagship store on Franklin, also located in the BCD, sits on 3.53 acres primed for redevelopment and currently on the market. (NAICascade.com/listings-3)

Taxes. With the new administration seeking additional avenues to fund initiatives, investors are wary of what the new tax implications will be. Biden’s tax plan asks that, “those making more than $1 million to pay the same rate on investment income as they do on their wages,” as quoted by Bloombergtax.com. This particular change is estimated to double the federal capital gains tax rate for those earning more than one million dollars. Biden also proposed eliminating the 1031 “like-kind” exchange for investors with annual incomes greater than $400,000 to fund a child-care and elderly-care spending platform per, an article in TheRealDeal, New York Real Estate News. (bit.ly/36n8Ctq)

Recession? While Central Oregon continues to perform at pre-pandemic numbers, there are those who show concern about a pandemic-related recession. Office vacancy in Bend is up six percent since Q4 of 2019. Nationally, 54 percent of tenants received rent relief in 2020. Also taking a heavy hit is the hospitality market. Hotels in major cities faced months with no revenue and are anticipating a 50 percent vacancy rate in 2021, forcing adaptive reuse of the space to include affordable and senior housing. Central Oregon continues to defy the odds. The pandemic spurred the renaissance of the road trip and license plates from across the U.S. can be spotted in downtown Bend on any day of the week. 

The industrial asset class has consistently been a top performer in Central Oregon and nationwide. The first two months following the pandemic saw as much growth in e-commerce as in the previous ten years. “Soaring demand has prompted e-commerce retailers and third-party logistic companies to make aggressive real estate plays in every major U.S. Market,” as quoted by Bisnow. As demand for space continues to grow, so to do leasing rates. As an example, Redmond industrial units have seen a 20 percent increase in lease rates over the past year. 

There are countless unknowns at play in 2021: Will we see the end of the pandemic this year? Will we return to the office and schools? What implications will the change in administration bring? But in one area, the forecast remains clear… Central Oregon is the place to be. 

NAICascade.com

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