Bluestone & Hockley Real Estate Services
Despite a slow 3rd quarter Portland’s retail market continued its steady growth heading into the final quarter of 2013. Overall Portland’s rental rate and vacancy remained stable while only a hand full of properties were delivered to the market. Submarkets in and around Beaverton and the I-5 corridor saw little if any construction but are poised to bring major deliveries to the market in 2014. East of the Willamette saw the most construction during this slow quarter with a number of deliveries and current construction taking place. While local investors are dominating the retail market interest is growing as population and employer growth is catching the interest of national and regional investors looking for new markets. The third quarter was far from lucrative but few negative indicators and major projects upcoming show the market’s stability moving into 2014
Absorption
The market experienced (3,848 sq. ft.) in absorption in the most recent quarter, capping off a month with very major deliveries and some high-profile move-outs. K-Mart vacated two locations in Clackamas and Tualatin, which totaled 218,159 sq. ft. Natural Grocers and Orchard’s Hardware and Supply moved into new Beaverton locations occupying a combined 73,000 sq. ft.
Vacancy
Vacancy remained stable at 5.6%, a .1% increase from the year before. Total available space is currently on the downtrend as the market lacked a sufficient amount of new construction. Close-in SE and Northwest experienced the lowest vacancy in the Portland metro area at 3.6% and 1.2 respectively.
Inventory and Construction:
4 buildings were delivered to the market in Q3 totaling 99,726 sq. ft. Another 108,024 sq. ft. is still under construction mostly on the east side of the Willamette River. The top projects currently under construction are Belmont West, a mixed use property in the Southeast submarket whose delivery date is set for the final quarter of 2013, and North Light Creative, in the Central Business District, which will be delivered in the second quarter of 2014.
General Retail (Single tenant free standing general purpose commercial building with parking)
General retail property had a 4.0% vacancy through the quarter with rental rates averaging $14.28. East of the Willamette river currently has 67,000 sq. ft. under construction of general retail properties.
Rental Rates:
Rental rates have risen from $15.51/sq. ft. to $16.06/sq. ft. from a year ago, showing good progress over the year. According to Kidder Matthews, “Free rent concessions and tenant improvement allowances continue to lessen, increases in rental rates is a positive indicator. The outlook is for slow, continued growth”
Sales Activity:
In the second quarter 20 retail locations closed with a total volume of $403,358,478. The 20 buildings totaled 2,457,344 sq.ft. with an average price per sq. ft. at sale time of $168.21/sq. ft. Cap rates for retail properties have been lower in 2013, averaging 7.83%. Compared to the same period in 2013 they are more than half a percent lower when they averaged 8.64%. One of the largest transactions in the last year was 978 Lloyd Center. 1,300,00 sq. ft. for $147,950,000 at $113.81 per sq. ft. It was sold on 6/11/2013.
Areas/Properties to Note
East of the Willamette River there was moderate construction, outpacing most of the metro area during a slow construction quarter. In total 8 buildings in the Southeast and Northeast submarkets, totaling 74,874 sq. ft., are under construction. 63% of the rentable building area in these new projects have already been leased, a good sign for the submarket and property owners. Mixed use buildings with multiple tenants are being built along streets like East Division, East Hawthorne and East Belmont. Close in SE, Close in NE and the Lloyd District are enjoying a combined vacancy rate of 3.6% with rental prices matching the metro area average of $16.06/sq. ft. Belmont West, located in the Southeast submarket is already 90% with rental rates averaging $24.00/sq. ft.
West of the Willamette River had very little new retail construction but confidence remains high for this area because of the growing population, strong employment base and recent retail success. Beaverton, Southwest Portland and the I-5 Corridor are proven retail centers and include residents with the highest average income in the metro area. In the five submarkets west of the Willamette the vacancy rates are hovering around 4.0% with rental rates higher than the metro area average at $18.51/sq. ft. The slow quarter did not suppress the excitement investors and developers will experience in 2014, when the west side adds seven new shopping centers with strong anchor tenants. Deliveries scheduled for next year include properties in Lake Oswego, Nyberg Road, Sherwood and Cedar Hills. Anchor tenants already signed up to join one of these incoming properties include Cabela’s, New Seasons and Walmart. The properties look to capitalize on the population growth and major apartment development taking place in Beaverton and Washington County.
Conclusion
A slow Q3 for the Portland Metro Area should not deter investors or new tenants. The metro area is looking down years of continued growth so long as the investment atmosphere remains favorable with low interest rates and growing employment in key areas. The rise of apartment development is generating more retail investment to meet future demand, especially amongst high-end grocers battling for position in new retail centers. Although local investors are currently dominating the retail development other Pacific Northwest firms and some California firms are catching on to the growing retail market in the area. Steady growth in rental rates and low vacancy rates combined with growing interest among local and regional tenants with proven success have spurred investors and developers to increase the number of retail properties. With stable capital markets and strong employment growth throughout the area, Portland will be a retail investment destination for years to come.
Source: CoStar Retail Market Report
Kidder Matthews Retail Market Report
