We keep hearing, “Are you busy?”, “Has business slowed?”, “It’s a tough time to be in real estate!” While the residential market pulled back when interest rates skyrocketed to combat post-pandemic inflation, we have yet to see a slow across all verticals of commercial real estate in Central Oregon.
“The real estate market 2022 was basically split in two when the market realized skyrocketing rates and it started to have impact on the market. The first half of 2023 will still be a waiting game between buyer and seller expectations,” said Chuck, multi-family broker at NAI Cascade. Though the gap has narrowed in expectations of price, the cost of financing sets buyers up at a disadvantage and widens that gap again. However, there are motivated sellers that have to sell, and we expect to see some creative financing including seller-carried contracts to bridge some the margin.
By the time of print, we will know if the Fed is starting to pump the breaks when they raise rates for the 8th time in a row post-pandemic. The latter half of this year will see expectation gap shrinking and the market will start to move again nationally.
By the verticals:
Retail
While big box retail and malls suffered in the pandemic nationally, neighborhood retail held up well and vacancy rates are roughly where they were pre-pandemic with rents up about 10%. Central Oregon saw similar trends and the vacancy rate is currently 2.1% with rates up 3.1% and 62K sq. ft. under construction with several national retailers and restaurants in the pipeline.
Cap rates have risen with the cost of debt and will likely follow that curve. Single-tenant, net-leased retail will continue to be an investor favorite. As retail lease escalators are typically tied to inflation, investors are well-positioned to weather economic turmoil. A well-managed property will be imperative in keeping costs down and NOIs high to narrow the gap between cap rates and interest rates.
Office
Office is performing well in Central Oregon. While work from home is making it hard for companies to determine how much office they need in larger cities, Central Oregon is back in office. Vacancy rates is down to 3.3%, roughly pre-pandemic levels, and nearly 10% lower than national levels. Rents are up a modest 1.8% and there is 30K sq. ft. under construction.
Office sales prices and volume are up in Central Oregon. Nationally, office investors can capitalize on the soft market.
Medical Office
Medical office vacancy rates are also down, and rents are up. A large, aging baby boomer population will drive demand for medical space and sustain leasing performance over the next five to ten years.
Medical office is a favorite for investors as medical leases typically run longer than standard office leases due to infrastructure investment making them a choice, long-term hold. Sales prices are up and cap rates are down. “The recent announcement of St. Charles Cancer Center plans in Redmond will be a catalyst for other medical developers to break ground nearby in the next few years,” said NAI Cascade partner and broker, Walt Ramage who leased the nearly 16,000 sq. ft. redeveloped Central Oregon Medical Specialists building nearby.
Industrial
Industrial space for lease and for sale remains in high demand. Vacancy rates are at 1% in Central Oregon, just over 4% nationally, and lease rates are up 6.3%. With construction numbers down and 12-month absorption nearly double that of the square feet under construction, we expect to see increased industrial development where land availability and zoning allows, namely Redmond and Prineville.
Multifamily
Nationally, vacancy is on the rise and rent growth slowed which is likely to continue through 2023. However, the long-term housing shortage should support demand and growth over the next five years. Locally, vacancy is still down and rent growth is up slightly though slowing. Interest rates continue to put homeownership out of reach for some Central Oregonians and drive upward pressure on rents. However, multifamily construction numbers are down as some projects in the pipeline are on hold do to the cost of construction financing.
The cost of raw materials has plummeted, the cost of labor has evened but capital is expensive. “Buyers are making strategic moves to set themselves up to have a stronger base,” says Walt. Central Oregon investors and developers are well-positioned to play the waiting game when it comes to the cost of debt.
The region and the people within it are resilient and well-positioned to take advantage of a market slow when or IF that time comes.
