As we step into 2024, the economic landscape is not without its challenges. Interest rates are higher than they were in Q1 2023 and the looming specter of a highly divisive election will no doubt create economic turbulence. However, much like 2022 and 2023, commercial real estate in Central Oregon continues to stand resilient. Despite the headwinds, there are notable trends and strategies shaping the industry, painting a promising picture for the year ahead.
Buyer and Seller Expectations Finding Common Ground:
In 2023, prospective buyers hesitated, awaiting a clearer understanding of interest rate trends. As we transition into 2024, the lending landscape suggests incremental decreases and stabilization. Notably, the gap between asking and sales prices is widening, signaling that sellers are coming to terms with the no-longer inflated market rates and are willing to do what it takes to get buyers off the sidelines. Instances of multiple offers persist with unique property types and when properties are accurately priced.
Financing Takes Center Stage:
In the face of higher interest rates, the market has responded with innovation in financing. Creative solutions, such as seller carry financing, have gained prominence, providing an alternative to conventional bank loans while adding long term benefits to sellers who are able to carry the note.
At the January 31, 2024 FOMC Committee meeting, the Fed opted to hold interest rates steady for the fourth straight meeting though most economist agree that rates should decline in 2024 and the 30-year fixed mortgage rate should fall to the low 6% range in the end of 2024.
Shielded from Urban Doom Loop:
Central Oregon benefits from a protected market. The unique blend of natural beauty, strategic location, and a resilient local economy contributes to the region’s insulation from broader economic downturns. As a tertiary market with a steady population influx, Central Oregon is shielded from the notorious urban doom loop that has impacted primary markets.
Nationally, stabilized return-to-office statistics reveal elevated vacancy rates, ranging from the high teens to twenties across major cities. As a result, retailers have exited the market, and residents have migrated to suburban areas and smaller markets, resulting in reduced tax revenue for large cities. The decline in revenue translates to a reduction in services, fostering a cycle of taxpayer exodus.
While the Bend market’s office vacancy rate climbed in 2023 into 2024, retail vacancy has taken a steady decline and rent growth rates are up across all verticals.
The Unknown: Election 2024
Election years introduce uncertainty, impacting the US economy with lower gains and negative effects on job growth, GDP growth, and stock market stability. Commercial real estate is also influenced by elections in various ways.
Economic Policies: Government decisions on taxes, spending, and regulations affect businesses and, consequently, the demand for commercial properties.
Infrastructure Spending: Promised increases in infrastructure spending can lead to new construction projects, boosting demand for commercial real estate.
Interest Rates and Monetary Policy: Government choices on interest rates and monetary matters impact borrowing costs for businesses, influencing financing for commercial real estate projects.
Sector-Specific Impact: Different commercial real estate sectors respond differently to policies related to technology, healthcare, or energy, affecting demand for specific property types such as data centers, laboratories, and alternative energy infrastructure.
What to Watch: Office and Retail
Typically seen as the commercial real estate darlings, multifamily and industrial have moved out of the limelight. The multifamily market has no doubt taken the hardest hit from rising interest rates. Industrial construction has slowed and with the delivery of 150,000 SF of space in Central Oregon in 2023, vacancy rates have nearly tripled though still sit at about half of the national average.
Office vacancy rates made a steep climb in 2023, nearly doubling from 3.3% to 6.2% but still well below the national average of 13.7%. With no new office space in the pipeline, these spaces should be absorbed although many large spaces may need to be reconfigured into more palatable sizes.
Retail is on the rise across the board with increased construction numbers, rent growth, and market sale prices, outperforming all other asset classes in the Central Oregon market. Construction is well underway in the Gateway North Development which will include Costco and adjacent retail pads. Several national retailers are expected to backfill the Hwy 20 Costco building. Reed South is nearly 100% occupied and developers are starting to put pen to paper for retail and light industrial space in the SE Elbow.
While 2024 may be characterized by economic turbulence and the anticipation of a pivotal election, Central Oregon’s commercial real estate market stands as a testament to resilience and the old adage, location, location, location. The convergence of buyer and seller expectations, coupled with creative financing solutions and a protected market, position Central Oregon as a stronghold in the face of uncertainty. As the year unfolds, stakeholders in the region can look forward to a market that not only weathers the storm but continues to thrive.
