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The year ahead is likely to see further improvement in commercial real estate markets as the economy continues to recover from the COVID-19 pandemic. Investor demand for income-producing properties in high-growth markets will keep Central Oregon at the top of the list. Fundamentals of this region remain — days of sunshine, livability, outdoor amenities and quasi-rural lifestyle are at the top of the list.
According to Forbes, “CRE markets rebounded in 2021. Transaction volumes in the first ten months of 2021 rose 64 percent from the comparable period in 2020 and were 12 percent above 2019. Purchases of industrial properties and apartments were more than 30 percent above 2019 levels, while retail and office market transactions lagged.”
Hedges against inflation will draw capital out of equities and redeploy it into real estate. Prices of industrial and apartment properties rose at a double-digit rate through the third quarter of 2021, according to the CoStar Commercial Repeat Sales Indices. Office and retail continue to recover more slowly but are bouncing back. If interest rates remain low, cap rates will follow. Cap rate spreads to Treasury yields follow trending we have seen for the past ten years.
Apartments & Housing
Demand for housing is still not being adequately met with supply. With less than a month’s worth of supply in the single-family residential market, demand is driving pricing. Many factors affect this, including Oregon’s land use laws and requirements for density in a state where people prefer breathing room.
Available labor and commodities pricing are biggest risks for developers taking on larger swaths of land for development. Working through high infrastructure costs to build out water, sewer, power and roads to and through sites with the local municipalities is time-consuming and costly. Housing demand is creating a massive backlog in development departments and the lack of available labor is making it difficult for contractors to commit to development timelines. Projects that developers would like to bring to market in the next 12-18 months are getting pushed beyond two years and timelines are still growing. Unless new construction increases 200-300 percent, there will continue to be shortages. Demand coupled with inflation will keep both rents and home prices strong.
Overall, those who own apartments in Central Oregon are benefiting from upward pressure on rents because of the lack of supply and they are proud to own in a market that is consistently appreciating. Despite Oregon being the only state in the union with rent control, Central Oregon multifamily owners are faring well with their investments. Cap rates are sticking around the 4.5-5.0 percent range.
Self-Storage & Industrial
Predictions for 2022 include a demand for storage and distribution/manufacturing. With housing footprints aligning with community development plans for density Central Oregon resident are clearing out space to continue to work from home and having more space for those RVs, boats and other recreational vehicles will be in high demand.
Central Oregon’s biggest challenge is available land to develop industrial. Redmond will lead the charge as their land-use planning has much larger acreage allocations for industrial land vs. Bend. Local operators may push to Prineville but the cost savings for space doesn’t outweigh the cost for national manufacturing/distribution operators to deploy trucks (and hire drivers, already short supply) to get to the main arterials of Highways 20 and 97.
Office/Medical Office
Zoom fatigue is setting in and more employees are voicing a desire to return to the workplace. Smaller offices, shorter term leases and subleases are reconnecting Zoomers with the communities they live in. Larger regional and national employers are working through perceived losses in productivity and company culture challenges as a result of employees spending less collaborative time together. Office will remain fluid as variants and spikes push employers to consider the risk/return of having workers at the office in-person.
Medical office continues to be a shining star as demand for services along with the Cares Act provides additional income to help buoy those medical providers who depend on surgeries and other procedures. Hospitals, burdened by lack of space to meet the needs of those both needing COVID care and other acute care, are revisiting how they are sharing their space — and in some instances, pushing out subleasing tenants so they can meet their own space needs.
While some administrative support needs have been moved to a work-from-home model, the demand for urgent care and post-op care will continue to grow with an aging population. Rents are rising in response to this demand with rates in the $2.65-$2.75/sq. ft. range for existing clinical medical office space in Bend and $1.85-$2.10/sq. ft. range in Redmond. With absorption rates on the rise, new development could be on the horizon.
Retail
Retail will continue to hold throughout Central Oregon. This market sector didn’t see the pandemic-related vacancies that the office sector experienced. Retailers who were able to easily shift to their online platforms reported some of their best numbers to date. As the pandemic transitions to an endemic and consumers return to brick and mortar, the infrastructure and consumer base for online sales that retailers gained over the past two years will continue to bolster sales.
Retail therapy has been a factor throughout the pandemic years as consumers seek instant gratification and self-improvement. Recreation-based retailers benefit from folks looking to escape the monotony of work from home and experiential retail will continue to make a comeback in the coming year.
As online kingpin Amazon announced plans in January to open its first brick and mortar clothing store by the end of 2022, it is clear that physical retail isn’t going anywhere.
As inflation-adverse investors turn to real estate to hedge their holdings and demand continues to outweigh supply, especially in desirable tertiary markets, the forecast remains clear in Central Oregon…it is still the place to be.
