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Recap: Portland: Why Now? The Drivers Behind Investment and Development Opportunities
Written by Rebecca Biermann Tom
This 20th CREW Annual Economic Forecast Breakfast on January 9, 2015 was one of the best yet. Once again, the panel of speakers was moderated by Craig Wessel, publisher of the Portland Business Journal. He was joined by Mark Deason, Senior Vice President Acquisitions of Starwood Capital Group, Steve Wells, Senior Managing Director for Trammel Crow Company, and perennial favorite, John Mitchell of M & H Economic Consultants.
Mark Deason provided those in attendance with a national and international perspective. Starwood has 12 offices in six countries and holds $40 billion in real estate assets, including office, multi-family, retail, 800 hotels and residential developments. Mr. Deason noted that we still have a volatile global economic environment that varies from city to city and country to country. He compared today’s real estate market with that of 2006-2007. The number of new projects is lower now, interest rates are lower, net operating income growth has a more positive trend. Relative to other investments, Mr. Deason noted that real estate offers better yields. The picture is not all rosy, however. This economic recovery has been one of slow growth. Although the national unemployment rate is at 5.6%, labor force participation is at a 36-year low. Mr. Deason summarized Starwood’s strategies across the globe: (i) Starwood typically acquires underperforming assets, remodels them, leases them up and refinances or sells them in a one to three year timeframe; (ii) Starwood has several people on staff who work to make sure that the Starwood hotels come up highest in the travel and lodging search engines such as Expedia; and (iii) with respect to malls, Starwood has staff with connections to global retailers, which enables it to entice the retailers to come into a new market where Starwood has malls. Sixty-five percent of the investments in Starwood’s current development fund are in Europe, because Europe is several years behind the United States in resolving troubled real estate assets.
Steve Wells offered a more local viewpoint. He noted that 2014 was a banner year for Portland. Portland’s real estate market is healthy across all product types. In comparison with Seattle and San Francisco, Mr. Wells noted that Portland has less development competition although scale is a challenge. Cap rates between these markets are narrowing, but were historically widespread. Portland’s multi-family vacancy rate remains at three to four percent, despite a long, active construction cycle. We have experienced seven percent rent growth, topping most markets other than San Francisco and Denver. Cap rates in Portland multi-family are currently 4.5% (50 to 100 basis points over Seattle and San Francisco). However, the number of proposed projects has increased 50%. The impact of Hassalo on 8th on the Portland multi-family market remains to be seen. Mr. Wells observed that condos are coming - probably 7,000 units in the next seven years. Apartment permits are at historic highs but single-family permits are still low. Mr. Wells thinks these numbers will revert to their mean.
Mr. Wells stated that over the last six years, Portland added less than one million square feet of industrial space. The good news is that vacancies are decreasing. Portland saw its first speculative industrial project in years completed in 2014, Capstone’s PDX Logistics Center. Another 2.5 million square feet is currently underway, equivalent to one year’s absorption. In contrast, office demand has been shrinking in the Portland market. Mr. Wells estimates that we will have a couple years of very strong absorption. Portland is in very good shape compared with other markets. Office rents are up dramatically. The CBD/Lloyd District has an 8.6% vacancy rate and has been rotating out of traditional financial, insurance, real estate tenants into
tech. Outside the CBD, there is an 8.1% vacancy rate and new leases constituted 83% of the metro area net office absorption. Mr. Wells expects office absorption rates to average around one million square feet per year.
He noted that the Portland retail vacancy rate is currently five percent, with an emphasis on services. There are six ground up hotel projects in the works in the CBD plus, along with various remodels. These projects are putting increasing pressure on urban land prices. Portland hotels are experiencing very high occupancy rates and rooms are difficult to find. Mr. Wells had the room laughing when he said, “It’s good to be a Goodman or a Schnitzer.” Prices for land in the CBD have risen dramatically. Close-in Eastside prices are currently around $165 per square foot, up from $65. The market is volatile but healthy.
We have scenic beauty, outdoor recreation, great beer, wine, food and books. Mr. Wells observed the Portland ethos is tolerance, earnestness, kindness and we’re not Texas. He concluded with saying that the key to long term prosperity for Portland lies in seeking balance.
John Mitchell wrapped up with an entertaining presentation about the economy. We are back at pre-recession employment levels. We have robust apartment growth, stronger population growth, increasing building permits, growing income levels and lenders are looking for commercial real estate projects. Inflation remains very low, growing 1.3% from November 2013 to November 2014. Short-term interest rates have been basically zero percent since December 2008 and the 30-year rate is down to 2.5%. However, the consensus is that the US will experience three percent GDP growth in 2015.
Why 2015? Mr. Mitchell noted that we have less fiscal drag, employment gains, net worth is on the rebound to pre-recession levels, real disposable income is rising, oil prices are falling, housing is recovering, and state and local finances are in better shape. However, there are global growth worries. He noted that for technology hubs, place matters. Funds are available for new projects and acquisitions. We are in a “fading Great Recession Hangover”, according to Mr. Mitchell.
Overall, this year’s speakers were positive about the outlook for the US and Portland in 2015.
The focus of this year’s presentation is “Portland; Why Now? The Drivers Behind Investment and Development Opportunities”. Our speakers will include Mark Deason, Senior Vice President/Acquisitions, Starwood Capital Group, Steve Wells, Senior Managing Director, Trammell Crow Company and John Mitchell, M&H Economic Consultants. Craig Wessel of The Portland Business Journal will be the moderator. We expect a sell-out crowd of Portland’s prominent business men and women in commercial real estate.
CRAIG WESSEL, Publisher, Portland Business Journal
Publisher of The Portland Business Journal for the past 14 years, Craig has been involved in the newspaper and magazine publishing industry for nearly 30 years.
He began his publishing career with American City Business Journals as Director of Development and was involved in the launch of more than 15 regional business newspapers. He has worked as an independent publishing consultant and executive for a wide array of magazines and newspapers across the country.
Wessel has an undergraduate degree in International Finance from the University of Georgia, a certificate in Music Composition from the Grove School of Music in Los Angeles, and has completed several courses of study in publishing industry related seminars, conferences and symposiums. He currently serves on the boards of the Portland Business Alliance, CASA for Children, Doernbecher Children’s Hospital Foundation, and is an emeritus board member of the Classic Wines Auction.
JOHN MITCHELL, M & H Economic Consultants
John Mitchell received his B.A. degree from Williams College and his M.S. and Ph.D. degrees from the University of Oregon. He is a fellow of the College of Arts and Sciences at the University of Oregon and a member of Phi Beta Kappa. He was a professor of economics at Boise State University for 13 years, before joining U.S. Bancorp in July of 1983. He was Chief Economist of U.S. Bancorp until July of 1998 and served as Economist Western Region for US Bank until July of 2007. He wrote US. Bancorp’s regional publications including the Update, The Business Barometer, Northwest Portrait, US Territory, Oregon Tidbits, and was a columnist for Oregon Business Magazine. He currently speaks to conventions and business groups around the nation and writes Sterling Savings Bank’s economic newsletter. He was a business analyst for KPTV in Portland. He has been making economic presentations on the nation and the region for 40 years.
STEVE WELLS, Trammell Crow Company
Steve Wells serves as the Senior Managing Director for Trammell Crow Company's Portland Business Unit, in charge of all development and investment activity in Oregon and southwest Washington. With Trammell Crow Company from 1988-2002 and 2004 to the present, Steve has led business units since 1999. His leadership roles have included development, acquisition, brokerage, property management and construction management activities for business units in Portland, Chicago, Milwaukee, and Indianapolis, with as many as 160 employees and annual revenues as high as $25 million. Steve has directed development and investment activity in Greater Portland since 2004.
MARK DEASON, Starwood Capital Group
Mark Deason is a Senior Vice President in the Acquisitions Group at Starwood Capital Group. Based in the San Francisco office, Mr. Deason heads up the Firm’s equity acquisition and management efforts in the Western United States and Mexico. While at Starwood Capital, Mr. Deason has participated in the investment of more than $2 billion of equity throughout the capital structure, in multiple asset classes. He has worked on a number of the Firm’s commercial, hospitality and residential acquisitions and developments, and has also assisted the Firm in its Asia efforts.
Prior to joining Starwood Capital in 2003, Mr. Deason worked for Merrill Lynch in the firm’s real estate investment banking group, assisting West Coast real estate, hospitality and gaming companies with a range of capital origination and M&A activities.
Mr. Deason received a B.A. degree in business economics with a minor in accounting from the University of California, Los Angeles. Mr. Deason is a policy board member at the Fisher Center for Real Estate and Urban Economics, and is a member of the Milken Institute and the Urban Land Institute.