By Chad Encinas, Holland Partner Group.
Early in the morning on Thursday, November 16, hundreds of real estate professionals from throughout the Portland Metropolitan gathered at the ballroom of the The Nines Hotel to hear insights from ULI’s annual Emerging Trends in Real Estate report. Price Waterhouse Cooper’s annual report captures the responses from over 500 real estate professionals in topics ranging from investment opportunities, market sector trends, capital markets and development. The theme for 2018’s report is “Navigating at Altitude”, and was presented by ULI Global CEO Patrick Phillips. This was followed by an in-depth discussion of Portland’s 24-acre Broadway Corridor, a once-in-a-generation opportunity for a development to provide economic vitality along with vital community benefits.
Patrick Phillips | Global CEO, Urban Land Institute
Eric Cress | Principal, Urban Development + Partners (Moderator)
Kimberly Branam | Executive Director, Prosper Portland
Mark Edlen | Co-Founder & Chairman, Gerding Edlen Development
Nolan Lienhart | Principal & Director of Planning & Urban Design, ZGF Architects
“Navigating at Altitude”
- Respondents were asked to characterize the expected profitability of their real estate businesses in 2018, with 79.6% responding “Good-Excellent”, 19.3% “Fair”, and a mere 1.1% responding “Abysmal-Poor”
- The most commonly used words to describe the 2018 real estate market were “Competitive”, “Cautious”, “Measured”, “Uncertain”, and “Growing”
A Long Glide Path to a Soft Landing
- The current expansion of 2009 – today has lasted 101 months, which is longer than any modern expansion besides the 1991 – 2001 expansion of 121 months, and is also the most moderate expansion. The trend looking back appears to point to milder and longer expansions
- In terms of pricing, one major takeaway is the growing price gap between major and secondary markets (including Portland)
Working Smarter and Harder
- Workplace productivity growth has slowed to 0.6% from 2011-2016, compared to 2.4% from 1991-2010; but breaking this number down by sector shows a wide gap between sectors, with the Information and Real Estate sectors leading productivity growth, while Finance/Insurance and Construction sectors lag behind
- In terms of real estate, businesses are responding by trying to maximize productivity per SF, this time through operational synergies rather than just space compression
- Office inventories show that only 19% of current offices were built in this century – which will have an affect on productivity as well as the capacity for shared work, and redevelopment potential
- Office cap ex as a percentage of market value is near a 30-year low which indicates that more investment in existing buildings will be necessary going forward in order to keep them competitive
Procession of Generations… Gen Z
- Keeping in mind the lessons learned from incorrect assumptions about prior generations, there are some defining influences that Gen Z will have on the real estate market
- This generation is more oriented towards pragmatism, caution and personal security
- They were born into technology use, not adopters of it; they are social, mobile and interactive in their digital lives
- Their initial housing preferences are in urban centers, but they have a much higher desire for home ownership, and they expect that home to be a smart one
- DIY home flipping shows have given Gen Z a predilection for lower-cost fixer-uppers; and they are not tied to major markets
- In the workplace, Gen Z seeks mentoring and hands-on management, with less tolerance for sharing than Millenials suggesting that office configurations will continue to evolve
Don’t Forget the Boomers
- Boomers are continuing to work later in life with 32% aiming to retire between 65-69, and 27% aiming to retire at 70 or older
- By 2024 nearly 30% of the population 65-74 is expected to still be in the labor force
- Best bet – senior housing of all types will gain momentum
Housing at a Technological Tipping Point?
- Despite increased demand coming out of the downturn, the number of new housing units continues to lag
- Construction prices continue to climb and show no sign of coming down soon; it is getting increasingly difficult to add units at a price point that matches buyer demand
- The industry will be looking at a combination of technologies to help alleviate price pain including off-site production, light-gauge steel, and improved construction management technology
Retail Transforms and Stores Remain
- E-commerce sales topped $100 billion, but represent only 9% of total retail sales
- The United States has an abundance of retail SF in comparison to other countries
- Changes include move from traditional department stores to discount department stores, fundamental changes to apparel manufacturing, and changing consumer preferences in what they want from a retail experience
- Best bet – NON-BORING RETAIL!
It’s Different This Time… The Market Outlook
- This year Seattle moves to the #1 spot and the list is dominated by secondary markets such as Portland, which came in at #13; survey respondents and interviewees both expressed rising interest in markets that were growing and more affordable than traditional gateway markets
- Suburban areas around these secondary markets should continue to see growth as Millennials move out of the cities to start families
- Property type preferences for investment and development were in line with trends discussed and include Fulfillment Centers, Age Restricted Housing, Moderate Income Apartments, Affordable Apartments, Medical Office, and Student Housing
- The local market outlook for Portland increased 13% from 2017 and was better than the national average in every property sector
The Broadway Corridor encompasses 32-acres and sits between Portland’s Old Town and Pearl neighborhoods. The area is currently dominated by the 14-acre Post Office site that was recently purchased by Prosper Portland for $88 million. The site is expected to absorb 10% of the Central City’s growth over the next 20 years and provide around 2,400 households and 4,000 jobs on the USPS site alone.
The vision for the Broadway Corridor is of a unique, diverse, vibrant, sustainable, mixed-use, dense urban district integrated with a regional multi-modal transportation hub. The project should acknowledge historic disparities and foster social equity and inclusion, reimagining how all people live, work, enjoy and move through the city in a genuinely transparent and equitable way.
The project will be lead by a set of guiding principles outlined below:
The site will also provide around 720 affordable units at 60% AMI or below.20% of these will be via a $14 million direct investment from the Portland Housing Bureau, while the remaining 10% will be through the Inclusionary Housing program.
The decision to purchase the property came as a result of a framework plan in 2015 to assess the ability of the City to purchase the USPS property. As a result – City Council authorized a line of credit of up to $40 million to generate resources to acquire the USPS property. Prosper Portland acquired the property from the USPS in September 2016 and the USPS used the land sale revenues to construct a new facility at the Colwood site near the Portland Airport scheduled to be complete in mid to late 2018.
Prosper Portland is currently accepting RFQ’s for a master developer who has demonstrated experience with:
- Financing comparably scaled projects
- Implementing similar scale and type of development
- Partnership with community members
- Maximizing diversity in past projects or business practices
- Recruiting large employer and medium size businesses
- Advancing green building and sustainable development
Additional criteria include:
- Transparent reporting on project metrics
- Activating multi-modal transportation hubs
- Delivering safe active transportation
- Leasing to businesses owned by people of color
- Maintaining a diverse and equitable workforce
- Utilization of certified firms and union vendors
- Providing a mix of housing types
- Providing opportunities for diverse range of small businesses
- Providing career pathways
- Minimizing ecological impacts of development
- Integrating nature in the built environment
- Developing large-scale mixed-use and mixed-income developments
- Developing projects serve as destinations
- Creating signature public spaces
- Integrating diverse art
Also discussed was the Racial Equity Impact Assessment that was performed, whose key findings will be incorporated into shaping the Broadway Corridor development process. These key findings include: engaging a diverse set of key stakeholders early in the process, checking assumptions and questioning every process, taking a long term perspective, structuring deals with equity goals in mind, and finding creative ways to support minority & community owned assets.