Substantial increases in construction and land costs, as well as a strict, decades-old Urban Growth Boundary, has caused the Portland real estate investment market to remain consistent for a number of years now.
According to a recent RLB Crane Index report, Portland has seen the second highest increase in construction costs in the nation this year. When you couple construction costs and growth restrictions with an urban landscape that contains a large percentage of generational ownership, you get a supply shortage for core retail investment properties. With the supply-and-demand imbalance comes record-setting cap rates that have prevailed for at least three years now. It is commonplace to see well positioned retail investment properties trading in the 4.5 percent to 5.5 percent cap rate range. Evidence of the market’s consistency over the past three years can be seen by the number of sales that have traded at a sub-5.25 percent cap rate during the first nine months of each year. This includes 14 sales in 2016, 14 in 2017 and 13 in 2018.
Not every retail segment has fared as well as the core, urban properties, however. While there’s little reason to believe any shift has occurred in the grocery-anchored market, it’s nearly impossible to determine as only one center has sold so far in 2018 — King City Plaza. At the other end of the spectrum, the big box and power center market has seen unprecedented shifts in demand and pricing expectations. There wasn’t a single power center that sold above a 7 percent cap from 2015 to 2017. So far, we’ve seen two in 2018 and likely would have seen others if they weren’t pulled from the market. The best example is Gresham Station, a 342,000-square-foot lifestyle center in the east metro area. The property sold at a 5.75 percent cap in 2015. It sold again in mid-September of this year at a 7.6 percent cap with a nearly identical tenant roster. There has been talk of big box risk and the “Amazon Effect” for several years now, but it appears that perceived risk is finally making a substantial impact on pricing for certain retail property types.
The single-tenant retail market remains strong in the Portland area. Fast food/QSR investment sales are still trading at record level cap rates between 4.5 percent and 5.25 percent. Interest rate hikes have had little impact on the local single-tenant market, and 1031 exchange capital is the primary buyer profile for these assets.
The local unanchored retail market is likely the most bifurcated segment that exists today. Well-positioned, newly constructed centers are trading at near-record cap rates while seasoned properties with less desirable tenant rosters have experienced softening demand and pricing. New construction of multi-tenant properties like Crossroads at Mill Plain and 164th are trading in the mid-5 percent cap rate range, while well positioned, older centers are trading in the 6.5 percent to 7 percent range.