SPECIAL EDITION 2020 RECAP & 2021 TRENDS
IN THE TRENCHES
A REAL ESTATE RESOURCE
An invaluable tool for Willamette Valley real estate and economic development professionals and their associates.
MAYOR CHUCK BENNETT
TABLE OF CONTENTS
A MESSAGE FROM SVN'S
The recent pandemic has forced us all to adapt to change and that goes for us at SVN Commercial Advisors as well. For the last thirteen years we have taken immense pride in putting together our annual SVN Economic Forum event where we all gather together with the common goal of learning where our market has been, and where it is headed. We pride ourselves in being the Mid-Valley market leader in education when it comes to commercial real estate and we will never waiver in that regard.
Current conditions forced us to pivot this year. Instead of an event we are pleased to present you with In The Trenches, a descriptive magazine detailing every facet of the Mid-Valley real estate market over this past year with glimpses into the future. We hope you find it useful to you during 2021. As conditions continue to improve we look forward to seeing each and every one of you in the near future and to the day when we can all convene again in one location.
CURT ARTHUR, SIOR | MANAGING DIRECTOR 2021 SVN National Product Council Chairman for Office Properties A licensed Principal Broker in the State of Oregon Oregon License 910200259 SVN Commercial Advisors, LLC
Dear business community,
The Salem Chamber of Commerce is a 501(c)6 notfor-profit membership organization supporting businesses of all sizes across the greater Salem area. We stand as the leading advocate for a healthy and sustainable economic foundation in the Willamette Valley. As an organization which represents nearly 1,100 businesses employing over 40,000 professionals, we believe in helping businesses prosper so our entire community may thrive. The Salem Chamber serves as the premier Convener of leaders and influencers, Catalyst for business growth, and Champion for a thriving community. We are honored to partner with companies like SVN Commercial Advisors who understand the meaning of true customer service in an incredibly complicated marketplace. Thank you for investing locally in the Salem market and we look forward to partnering with you now and into the future. - Tom Hoffert, CEO. Salem Area Chamber of Commerce
In 2020, the Salem Chamber of Commerce championed several key policies to support small businesses in our city. From a healthy community’s perspective, the Salem Chamber supported balanced policy enabling our police department a legal mechanism to navigate challenges for both property owners and our friends and neighbors on the street, specific to safety and right-of-way concerns on sidewalks and in front of Salem’s small businesses. Additionally, the Salem Chamber was a driver in the expansion of outdoor dining footprints and services for restaurants in the downtown corridor and throughout Salem. We worked closely with downtown businesses and property owners to ensure their needs and operations would not be hindered in this expansion program.
their take-out options and allowed consumers to share with a community of foodies, where they were spending their dollars. Since the middle of March, Salem Eats has grown to over 27,400 members, with over 98% of them engaging with the page more than once a week. More than 150 restaurants have been featured on the page, which in turn helps drive their visibility throughout our region. Since the creation of Salem Eats, there have been over 2 million total interactions (Posts, comments, likes).
The Salem Shops Facebook page was created right after the Salem Eats page with a focus on locally owned retail companies. The Salem Shops page has been a reliable resource for promoting our organization’s “Shop Local” campaign which the Salem Chamber rolled out during November and December. The Salem Shops page has roughly 3,400 active members who encourage consumers to keep their dollars local.
Lastly, the Salem Chamber created a third Facebook group, Salem Hires, which was created as a resource for both job seekers and businesses who are looking to fulfill employment positions as a free and easy to use jobs board. This platform currently has 1,400 members and over countless jobs have been fulfilled through the connections generated on the Salem Hires platform. Free PPE Rollout On January 1st, the Salem Chamber in partnership with the City of Salem and Business Oregon began a Free PPE program for small businesses. Over 120,000 masks, 40,000 pairs of gloves, 1,400 hundred boxes of sanitizing wipes, 120 gallons of sanitizer, and 40 thermometers were provided at no cost to over 270 locally owned businesses. As our community moves closer to the reopening of businesses, PPE will be in high demand and costs will be more expensive. The Free PPE Rollout program will aide in decreasing overhead costs for small businesses.
The Salem Eats Facebook page was created by the Salem Chamber at the onset of the government mandates which forced restaurants to prohibit dinein service. The idea behind the page was to provide a platform for restaurants to share with consumers,
TOM HOFFERT, IOM Chief Executive Officer Salem Chamber of Commerce Tom@SalemChamber.org
ZACHARY S. SIELICKY Membership Manager Salem Chamber of Commerce Zachary@SalemChamber.org
OFFICE OVERVIEW CURT ARTHUR, SIOR | MANAGING DIRECTOR PRINC. BROKER • SVN COMMERCIAL ADVISORS LLC
LEASING Negative office absorption is evident in 2020, reflecting COVID-19’s impact on the local office market. Still, lack of new supply, along with tight vacancies at the pandemic’s outbreak, will offer the Salem office market a measure of protection against the coronavirus.
2020 SUMMARY Office absorption in Salem turned sharply negative in the second and third quarter of 2020, with fewer tenants signing new leases and many tenants downsizing in the Covid-19 economy. As schools, businesses, and other ventures transition to a new normal to combat the spread of the coronavirus, the immediate and longer-term impacts on the office market are not yet fully clear. As Oregon’s state capital, virtually all of Salem’s largest office tenants are government entities. Construction levels have consistently been below the metro’s historical average throughout the post-recession era. Limited new supply and tight vacancies at the outset of the pandemic will offer Salem’s office market a measure of protection in contending with COVID-19. Still, office rents will likely continue to fall in the near term.
The major storyline of the past decade has been the relative lack of deliveries. Annual construction levels have been below the historical average for all but two years of the recovery. Outsized absorption in the face of limited supply has accelerated vacancy compression in Salem, at least until the pandemic’s outbreak. Absorption turned sharply negative in the second quarter, due to about 15 tenants moving out of no more than 15,000 SF each. Negative absorption persisted in the third quarter. As of yet, there is very little sublet space available in Salem. Just half a dozen new office leases have exceeded 10,000 SF in the past two years but as we ended 2020 leasing activity was robust. 135 office leases were completed for the year. In April, 2020 the State of Oregon Higher Education Department leased the 40,561 SF former administrative offices for local food processing cooperative NORPAC making this the largest office transaction in 2020. SVN Commercial Advisors was proud to broker this transaction with Jones Lang LaSalle.
Rent growth that hit close to 15% for higher quality buildings in 2019 went to zero in 2020. Investors are generally local and often owner/users. While sales volume was exceptionally high in 2019 it fell in 2020 but only to a level typical for most years. Salem office assets typically see lower annual investment than metro retail, multifamily, or industrial assets.
About a quarter of Salem’s workforce is employed by the government. By comparison, only about 14,000 employees are working in the professional and business services sector. Salem’s substantial government employment floor is reflected in the metro’s largest office tenants. The state-chartered workers’ compensation insurance company State Accident Insurance Fund (185,000 SF) is among the largest, with other sizable tenants including Marion County (116,000 SF) and the Oregon DMV (125,000 SF). In
Salem, two of the biggest private-sector office tenants are UTC Fire & Security/Supra Products (80,000 SF) and Morrow Equipment Company (55,000 SF).
RENT As the office sector grapples with the spread of COVID-19, asking rents are expected to fall in the near term. Year-over-year growth in 20Q3 was flat. Prior to the pandemic, office rents in Salem grew by just over 3.5% in both 2019 and 2018. Average market rents only exceeded the prerecession peak in early 2018, helped along by outsized rent growth the prior year. Influenced by the high proportion of older inventory in Salem, overall office rents are about 70% of Portland’s asking rent and 60% of the national asking rent. Alongside the relative age of Salem’s office assets, the lack of luxury options also weighs on rates.
Salem has no 5 Star and around a dozen 4 Star office buildings; there is less than 10% as much 4 & 5 Star inventory as there is 3 Star inventory.
SALES Though Salem sees a sizable number of office properties trade hands each year, 2020 sales volume was off 29.3% from 2019 with 35 transactions for $42.6 million compared to more than $60 million the year before. In May 2020, the 29,000-SF Willamette Professional Center sold for $5.6 million ($190/SF). The Confederated Tribes of Grand Ronde Indians acquired the building from a Salem-based individual investment group. This was an owner/user transaction, but the seller will occupy the building’s second floor for two more years. SVN Commercial Advisors was proud to represent the seller in this sale. In July 2020, the 22,000 SF Hollywood Station sold for $4.5 million ($204/SF) at a 7.11% cap rate. Salem-based Neighborly Ventures sold the asset to an individual investor in Portland. In September a portfolio of two buildings at 2965 and 2995 Ryan Drive totaling 36,600 square feet were sold to a local investor for $8,700,000 ($237/SF) at a 6.96% cap rate. In February 2020, the 26,000-SF Cascade Pacific Professional Center sold for $4.3 million ($166/SF) at an 8.06% cap rate. The Louisiana-based buyer and the Bend-based seller were both individual investors. The buyer brought his funds to Salem because of higher than normal returns.
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CONSTRUCTION Salem has seen below-average construction levels nearly every year since the Great Recession, and the pandemic is unlikely to further office construction. No office assets delivered in 2019 or 2020, and only two owner/user buildings of any size are in the pipeline. Since January 2010, Salem’s office inventory has increased by less than 4%.
Garrett Hemann Robertson, PC, one of the Mid-Valleys leading law firms, will break ground this year on their new 19.209 SF home on Skyline Boulevard in South Salem marking the first major law firm to abandon the central business district for a suburban location.
Also on Hawthorne, the Oregon State Treasury Resilient Building is a two-story, 36,000 SF project on the banks of Mill Creek and is being built to the highest seismic levels in Oregon history. Once completed this LEED Gold equivalent building will be able to pivot 18” in any direction and will have a carbon reduction factor equal to planting 100 acres of forest. Northwest Farm Credit Services is about to break ground on their new 24,507 SF building. Oregon regional headquarters in the 500 block of Hawthorne Drive SE where they purchased more than 10 acres in 2019.
2021 FORECAST We know Oregonians will be going back to the office in 2021 but at what level? Leasing volume in late 2020 was strong signaling a return to robust rent growth and a shrinking vacancy as we slowly come back from this Covid-19 economy. Sales prices per square foot will also continue to rise dramatically as the construction pricing continues to rise with no end in sight.
SALEM HEALTH In response to the growing and aging population in the mid-Willamette Valley, Salem Health Hospitals & Clinics broke ground on a seven-story, 150 bed building expansion in January 2020. The 201,000 square foot addition will have inpatient rooms on the third through seventh floors and shelled space for future needs on the first and second floors. The patient rooms will be built to ICU standard, which allows the maximum amount of flexibility to adjust to the patient care needs in the coming years. Salem Health Hospitals & Clinics CEO Cheryl Wolfe, RN calls this work critical for caring for Salem and the mid-Willamette Valley as it grows. “Though plans for this construction began long before the pandemic, this event has underlined the nationwide impacts of bed capacity and the importance of being able to adapt for intensive and critical care. ‘No patient harm is acceptable to us’ is our daily mantra and having enough beds is part of that culture of safety,” Wolfe wrote. This $245 million project includes a seismic reinforcement to the parking structure and redesign of the emergency room entrance. It will open for patient care in mid-summer 2022. Watch the progress unfold at salemhealth.org/campus-improvements.
Construction of the Salem Outpatient Surgery Center has continued in the 700 Bellevue Building (formerly Northbank Plaza), directly across Shelton Ditch from Building B at the hospital. Completion is scheduled for spring 2021. This surgery center is the product of a joint partnership between Salem Health, Salem Clinic, Willamette Urology, and Willamette ENT. Continued advances in surgical technology and practice allow more surgeries to be done in the outpatient setting. This partnership brings more capacity for surgical care into the community. HANNAH BAUER Facilities Development Project Consultant, Communications SALEM HEALTH Hospitals & Clinics 1155 Mission St. SE | Salem, OR 97301 Tel: 503-814-3778 | Cell: 503-428-4902
AGRICULTURE OVERVIEW E R I C H E N N Y | R E L AT I O N S H I P M A N A G E R N O R T H W E S T FA R M C R E D I T S E R V I C E S
2020 RECAP We are all tired of the 5-letter word that starts with Co and ends in VID… but the impact of the Virus on all phases of the economy including agriculture is the story that cannot be ignored. The success of any firm in 2020 can be largely driven by what marketing channel they were in and how they were able to adapt to needed changes. Lock downs and school closures found food service focused dairy, meat and egg processors with bulging inventories and inadequate processing capacity to meet the demand for surging retail packaging. Egg cartons were back ordered 9-12 weeks while store shelves sat empty and coops overflowed. But for processors focused on retail space like our own Tillamook County Creamery, 2020 was a chance to see unprecedented market penetration putting cheese and dairy products on shelves in New York for the first time. The work from home culture has created a boom of home improvement projects, helping fuel strong earnings for nursery, grass seed and forest products producers in the Willamette Valley in 2020. Hemp was the trip to Vegas that many planned for but turned into the don’t ask don’t tell outcome that hindsight easily called for. Fires and poor pollination create uncertainty for blue berries and wine grape harvests, while hazelnuts see the largest crop volume in Oregon’s history. Lockdowns hamper traditional sales channels for many but creative young and beginning produce farmers see 50-75% growth in CSA orders as consumers look for local and safe food supplies. In summary, 2020 for Willamette Valley Agriculture will be a successful and profitable year for most producers in a year of great uncertainty.
*These charts were compiled by Northwest Farm Credit Services appraisal staff. Sales reflected in the data have been allocated to the land class excluding the influence of improvements, homesites and other factors. In recent years we have seen a normalization of real estate values across the Willamette Valley that historically had premiums placed on land around Mid-Marion County and north to Portland. Investors and regional farmers’ motivation for high quality soils and water rights have widened the region they are willing to operate in. Orchards and multiyear perennial crops like hops, blueberries and wine grapes drive these investments. While ground in Linn, Lane, Benton, Polk and Yamhill counties still trade below some of the highest value regions in the Willamette Valley, the past two years have seen that gap narrowing as premium markets around St Paul and Mt Angel do not see as much growth in their per acre prices.
R E A L E S TAT E T R E N D S Limited inventory for sale in the Willamette Valley remains the normal for 2020 and heading into 2021. Tight supplies and stable crop prices continue what has been a decade long run of increasing land prices for both irrigated and non-irrigated farmland.
Fueled by a strong housing market, homesite values as a component of smaller tracts has increased in recent years but remains a moderate driver of price on larger commercially focused farmland. Notable land sales tend to follow landlord successions whose heirs seek investments outside of agriculture or from operations without a next generation intent on farming.
B O O M I N G G R E E N S PA C E March 2020 brought a deep breath in the US Corporate Boardroom as Major Firms, Lenders and Manufacturers all sought to increase liquidities on the balance sheet in preparation for what could be one of the worst economic cycles we’ve seen in 100 years. What followed, was a large segment of the workforce that had previously been working in offices, education and technical spaces move home… and proceeded to get… bored. No dinning out, no vacations and not driving to work left to this segment of the population with more free time and available disposable income that could now be focused towards a daily reflection of a yard or house that could use freshening up. And so, they shopped, clicked and had delivered what ended being a near 20% boom in sales for firms like Home Depot, Scotts Miracle Grow and Weyerhaeuser. Through three quarters of 2020 Home Depots’ sales were up an astounding 18.2% and net earnings up $1.2 billion dollars over the same time in 2019.
were equally interested in decorative plant material and lawn improvement this spring and summer. This trend does not look to be slowing down in 2021 as bookings for nursery stock remains vibrant and grass seed supplies are tight as garden centers look to a busy spring as lock downs continue in much of the country.
IT’S NOT ALL ROSÉ. For Oregon Wineries the story of marketing channels was most apparent as restaurant heavy brands saw the near elimination of sales in second and early third quarters. Lockdowns further reduced direct to consumer sales as most wineries were forced to close their doors to the public until early summer. Larger brands with distribution that service grocery and retail outlets were less impacted by the early lockdowns, but national trends show the average price of wine has declined through 2020 as producers seek to move volume and/or gain shelf space. What does look to be universal however is that consumers sought out their favorite winemakers and set record level of sales on E-commerce. In fact, all forms of alcohol consumption looked to online retailers, ordering clubs and direct vendor websites to source spirts during the lock downs at record pace.
*Data from firms 2020 Annual Reports
These strong sales figures carried through to regional producers as well. In a poll of the Nursery Industry compiled by Northwest Farm Credit Services we see all three segments of the nursery industry having solid gains in spring sales year over year in 2020.
Spring weather is a key driver for sales growth for nursery producers, but 2020 saw a renewed interest in consumers caring for their yards irrespective of sunny weekends. Economic concerns often spur demand for vegetable and fruit bearing plants, but homeowners
AGRICULTURE OVERVIEW Silicon Valley Bank’s ‘State of the US Wine Industry 2021’ highlights some of these key trends, most notably the Nelsen chart above. Consumers were not limited to online orders for their favorite beverage however, as wineries saw a 27+% growth in direct to consumer sales in 2020 per Sovos ShipCompliant. This growth in direct to consumer sales helped save annual revenues by keeping winery’s total incomes close to the previous year despite selling less volume. 2021 will face additional challenges for Oregon Wineries as 2020’s crop was short 20-30% in yield and then clouded by the string of wildfires afflicting Oregon during harvest.
The long-term ramifications of COVID on the US economy is yet to be seen. Farmers, Ranchers and Timber Producers are no stranger to adversity however, and by in larger are well situated with strong balance sheets and core earnings that should see the Willamette Valley stable for the coming years ahead. For more information about Northwest Farm Credit Services and resources please visit www.northwestfcs.com.
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INDUSTRIAL OVERVIEW ERIK ANDERSSON | PRESIDENT STRATEGIC ECONOMIC DEVELOPMENT CORPORATION
2020 RECAP After experiencing increasing activity over the past several years, the Salem region, like the rest of the world, was impacted by the COVID-19 pandemic. Until early 2020, vacancy rates were tightening and rents over the past decade had increased by about 46%. The region’s profile had benefited greatly by construction of the Amazon million square foot fulfillment center, and as a result, speculative construction was on the rise in the Mid-Willamette Valley. At the close of 2019, the bankruptcy of NORPAC Foods caused great concerns about its impact on the agriculture industry supply chain going into the new year. However, those real concerns were dwarfed by the economic impacts related to the onset of COVID in the first quarter. Not surprisingly, leasing activity and rent growth were expected to slow down and planned investments were postponed due to market uncertainty. It is notable that the Oregon construction industry was deemed essential, avoiding shutdowns that impacted neighboring states, and project activity did rebound after an initial dip. The industrial sector will likely weather the storm of COVID-19 than most sectors. Early in 2020, Amazon was confirmed as the new occupant of the 130,000 square foot former Panasonic building, purchased, and redeveloped by Reich Brothers LLC, a New York firm specializing in reuse of industrial facilities. That good news help buoy the industrial real estate market as impacts of both the NORPAC bankruptcy and the (then) oncoming pandemic loomed as significant uncertainties.
The uncertainty around NORPAC was partially addressed in early 2020 with the approval of the $49 million sale of its facilities in Salem, Brooks and Stayton to cold storage giant Lineage Logistics. By the close of the year, processing operations continued at Brooks and Salem facilities under lease to Oregon Potato/Pacific Northwest VegCo, with more activity expected in 2021 as operations consolidate. Adding to confidence for the future of the company in the region was approval of a Rural Industrial Investment Exemption by Marion County for an anticipated $15 million investment by PNW VegCo into the Brooks plant. Another major redevelopment story in the region in 2020 was the purchase of the former WestRock paper mill in Newberg to Commercial Development Company Inc. (CDC), a St. Louis-based firm that specializes in redevelopment of industrial sites. The purchase includes 120 acres of industrial land, and preliminary work has already begun on site clean-up by CDC subsidiary, Environmental Liability Transfer. Due to its proximity to the Portland market, the Specht I-5 Logistics Center property in Woodburn continues to attract national attention. The 108-acre site adjacent to I-5 can accommodate building sizes from 40,000 to nearly 2 million square feet. By the end of the year, activity bounced back at the Mill Creek Corporate Center in Salem. Capstone Partners announced it was extending its option for the northern 52 acres of Site F for its proposed Mill Creek Logistics Center project, while PacTrust has continued its commitment to the Mill Creek Corporate Center with the purchase of Site B. And Cushman Wakefield is actively working with a master developer for Site E, which will open that site to a variety of options for manufacturers seeking smaller footprints for their facilities.
2020 ACTIVE PROJECTS Four industrial projects are under construction across Salem at the end of the 2020. Two of those buildings comprise the South Salem Business Park, a 70,000 square foot multi-tenant project in development by Pacific Northwest Properties. This is the first Salem market project by the well-established developer, and its groundbreaking provided a much-needed cause for celebration for the community in July.
Salem industrial rents had been increasing at as much as 6% per year, with recent rents 50% higher than they were a decade ago. As expected, the impacts of COVID-19 slowed rent growth in the Salem market over 2020. CoStar reports that the annual growth over the past year fell to 2.7%, with the average cost per square foot at $8.07. But the good news is that positive growth is forecast, with rates forecasted to increase by 4.1%. While retail and hospitality sectors were particularly challenged by the pandemic, the industrial sector has fared relatively well. Within the Salem region, there remains a significant gap between rates in Marion and Polk counties. The premium for industrial space in Marion County over Polk County is about 52%.
I N D U S T R I A L VA C A N C Y R AT E
the close of 2020 and forecasts the region’s industrial vacancy rate to be relatively stable in the 5-6% range through 2024.
M A R K E T Q U I C K FA C T S
RENT PER SF
MONTHS ON THE MARKET
Industrial building sales in 2020 were surprisingly hearty, although much lower in dollar volume compared to 2019, when the Amazon Fulfillment Center was sold for $105 million, setting a record for the Salem market. In summary, the Market Quick Facts indicate a stable market faring relatively well during unprecedented times. While there was an increase in the availability of vacant square feet to over 1.6 million square feet in 2020, that figure will no doubt be influenced by industrial clients moving forward with planned expansions that were delayed due to economic uncertainty around the pandemic. While leasing activity is expected to slow in the near term as firms adjust expectations and needs after the outbreak of the coronavirus, the industrial sector may be best positioned among commercial real estate property types to endure. As we have seen in the Salem market, demand is already increasing for distribution and last-mile industrial facilities as consumers have adapted to online shopping alternatives for everyday goods including groceries. There have been reports of supply chain challenges faced by manufacturers, including labor shortages, which may have postponed investment decisions, but activity seems to be rebounding as 2021 starts. The Salem region’s robust activity over the past decade is reflected in the significant changes in vacancy rate. The impacts of the recession lingered for years, with an industrial vacancy rate of nearly 13% at the end of 2010. Before construction had the chance to catch up with demand, the vacancy rate fell as low as 2.7% in 2016. CoStar reports the Salem market vacancy rate at 5.6% at
2020 NOTEWORTHY PROJECTS
PACIFIC NORTHWEST PROPERTIES In July, a groundbreaking celebration was held for the South Salem Business Park on Fairview Industrial Drive. This project consists of two multi-tenant buildings totaling 70,000 square feet, with individual spaces ranging from 3,000 to 15,000 square feet. This is the first Salem area project for developer Pacific Northwest Properties.
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To advertise contact Jerry Stevens AMAZON DELIVERY STATION Early in 2020, Amazon was announced as the new occupant of the 130,000 former Panasonic building in Salem’s Renewable Energy and Technology Center. Delivery Stations are operations where customer orders are prepared for last-mile delivery.
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RETAIL OVERVIEW NICK WILLIAMS | ADVISORS SVN COMMERCIAL ADVISORS LLC
OVERVIEW The pandemic’s stay-at-home order for Oregon flat lined the demand for goods and services and has altered the demand outlook for Salem retail. This could be disastrous for many retailers, small local businesses, and multinational corporations alike. The biggest news in Salem’s retail market in 2020 was the closure of long-term tenant JC Penney (105,000 sq. ft.) and several other smaller retailers and restaurants that shut down permanently due to impacts from the Covid-19 economy. The only bright spot is these vacancies are providing some level of reprieve on the extremely low vacancies we reported on a year ago. Dana Vutgeveen, General Manager of Salem Center in downtown Salem, cites occupancy as low as 80%. This excludes for the former Nordstrom which is not a part of the mall. While he’s confident they will be operating well into the future, a shift from attracting national retailers toward a model of local and regional tenants will be part of Salem Center’s success in the years to come. “What the pandemic has revealed is how overbuilt our national retailer ecosystem is”, Vutgeveen said. The Oregon legislature voted to increase the minimum wage in 2016, with set annual increases through 2022 and inflation-indexed increases thereafter. Statewide, and estimated 301,000 jobs are affected by the wage increase, with a disproportionate impact on the retail sector.
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In a retail reuse play, the former home of Toys ‘R’ Us on Lancaster Dr NE was purchased in April of 2020. The 46,000 SF building is now the home of Willamette Career Academy, which will provide innovative programs to prepare students for high-wage, high-demand careers in Oregon. The Academy is a program of the Willamette Education Service District.
M A R K E T S TAT I S T I C S Vacancy remains tight, staying in line with the 3-year average of below 3% but interest is also waning with leasing volume down 20% this past year. In 2020 only 8 leases larger than 5,000 sq. ft. were signed compared to 14 the year before. Rent growth has not been especially strong at any point in the past decade, and rates have seen a cumulative increase of about 12% since bottoming out in 2012. Developers largely focus on build-to-suits, and inventory has increased by just 1.7% in the past decade.
CONSTRUCTION At Lancaster Marketplace the former Shopko location at 1230 Lancaster Dr. SE, was absorbed by Coastal Farm and Ranch, a regional retailer finding success catering to the needs of our areas Ag community. The 117,000 SF lease has given a breath of life to the southern tip of Lancaster’s retail corridor.
Retail construction was already limited in 2019 and in 2020 we hit a stand-still because of the pandemic with the exception being In-N-Out Burger opening in Keizer Station. In the past decade deliverables have been less than 100,000 sq. ft. every year, with the exception of 2017.
The Pointe at Glen Creek, a five-building 37,000 sq. ft. project in West Salem was a speculative project, unusual for Salem. Delivered in 2019, less than 10% remains available for lease, asking $33/SF NNN. Two notable hospitality developments opened in the last twelve months with the Holiday Inn Express & Suites in Keizer Station as well as the beautiful boutique Independence Hotel on the banks of the Willamette River in Independence. PacTrust announced late in 2020 that their appeal of Salem City Council’s decision relative to the Costco development along Kuebler Blvd. was successful and the project will now proceed. This has set in motion a flurry of interest in the subsequent retail pads available at the site. Costco’s departure from Mission Street marks a significant shift of this corridor away from bustling retail.
Holiday Inn Express & Suites Keizer Station
RETAIL OVERVIEW SALES Given the wide-range of economic impacts for the retail sector, the pandemic did contribute to a slowdown in investment activity. In Salem, retail has often seen higher levels of investment than office, multifamily, or industrial assets. There is a lack of institutional investment activity; buyers are typically smaller companies, owner/users, or individuals based in Oregon or California. Small shopping centers and NNN investments are favored opportunities. The market cap rate has hovered near 7% for the past few years and remained in 2020. In June 2020, the 112,000 SF Home Depot in Salem sold for $12.2 million ($109/SF) at a 5.81% cap rate. Home Depot had 9.5 years remaining on a triple net lease. The buyer and seller were both individual investors based in California. Two trades exceeded $6 million in the first quarter of 2020. In February, the 25,000 SF Nissan of Salem sold for $6.7 million ($273/SF) in an owner/user trade. The auto dealership sold between locally based parties: the buyer Nissan of Salem, and an individual seller. In March, the 38,000 SF Broadway Town Square sold for $6.2 million ($163/SF) at a 6.33% cap rate. The fourstory, conjoined mixed-use building traded between buyer Sandc, Inc. and an individual seller, both based within Salem. The end of 2019 saw Capitol Auto Group break ground on a 72,000 SF state-of-the-art facility just off the Salem Parkway. Construction was able to move through the pandemic year, and the project is now nearing completion. This facility will replace the current home of Capitol Subaru, which is a 18,000 SF facility. The new building will include a 40’ tall living green wall, a dog park, and a pavilion with two food trucks. “We project our opening date will be June 1, 2021” said Alex Casebeer, General Manager & Partner of Capitol Auto Group.
MARKET FORECAST Retail is facing a changing landscape unlike any other sector. “In the last decade we saw the face of retail change forever because of the internet. Now Covid has just compressed it that much more”, explains Jon Hummelt, a Principal in Willamette Town Center, formerly Lancaster Mall. “We have had to turn the mall inside-out and create storefronts like we did for Hobby Lobby, Ulta and Home Goods.” Overall there are fewer and fewer strong retail prospects. Those that have survived know their value and are driving tough deals and being selective on locations. “There is always demand for well-located real estate”, Hummelt added. This summarizes our outlook for retail in 2021 - fewer bigger deals with an emphasis on core locations. Smaller retail sales and leasing should rebound as the economy improves and our hope is that we see movement in the downtown area on assets like the former Nordstrom, JC Penny or Statesman Journal buildings.
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Salem’s multifamily market entered the pandemic with a strong history of steady rent increases, frictional vacancy below the 5% industry benchmark, and fast absorption of newly constructed units. In fact, the Salem/Keizer MSA has consistently outperformed both Portland Metro and National indices with regard to occupancy. However, the full impact of the coronavirus pandemic has yet to be truly measured in our local market. While there has not been significant quantifiable evidence of a decline in investment demand or marketability for this property type, some market indicators are suggesting a market correction is inevitable. Governor Brown’s eviction moratorium has shielded tenants from evictions due to non-payment of rent; perhaps providing a false sense of security with regard to multifamily occupancy. However, landlords can only make up the difference for so long before they too will need assistance in order to meet mortgage payments and other commitments. As the moratorium lifts, increased vacancy and lower rents are anticipated.
MARKET RECAP According to CoStar, the current inventory of multifamily units in the Salem/Keizer MSA totals 28,678 units, of which 182 units are currently under construction. The following chart summarizes market trends as of February 2021.
Current vacancy is 3.0%, with an average market rent of $1,108 per unit. Note, the CoStar survey reflects apartments of all condition and quality in the larger Salem/Keizer MSA apartment market. The analytics reflect continued improvement over the five-year survey period, as indicated by increasing rental rates for all unit types, sale price per unit, and declining cap rates.
may not be known for months.
VA C A N C Y Knowledgeable market participants report high occupancy for all types of multi-family projects regardless of year built characteristics or unit mix; however, newer projects remain more desirable. Vacancy over the past five years is juxtaposed against net deliveries and absorption in the charted below.
There has been steady apartment construction (deliveries) over the past four years, with deliveries and subsequent absorption of new units in nearly every quarter. The sharp decline in vacancy between Q4/2019 and the Q1/2020 reflects the onset of the pandemic. Governor Brown’s Executive Order 20-13 created a state-wide temporary moratorium on certain evictions and terminations of rental agreements and leases in response to the COVID-19 pandemic. This order was in effect until June 30, 2020. House Bill 4213 was passed by Oregon lawmakers on June 26, 2020. This extended the eviction moratorium until September 30, 2020 and created a six-month repayment period for tenants. It also clarified the process for landlords to send a notice of outstanding balance, offer payment plans, and the use of other types of terminations without a tenantbased cause. The law also creates a six-month grace period, from September 30, 2020, to March 31, 2021, for tenants to pay any past due rent without being evicted. The forecast is for continued low vacancy and steady positive net absorption; however, the real impact of the pandemic on the economy and rental housing remains to be seen. Notably, tenants have renter’s rights implemented by state mandate as a result of the coronavirus pandemic. As time goes on, market conditions may change as employment sectors such as the restaurant, hospitality industries, and non-essential services respond to extended economic pressure. The true impact on rental housing and clear path forward
RENT According to CoStar, rent growth in Salem has surpassed both Portland and the nation. While asking rents remain roughly 1/3 higher in Portland Metro, Salem’s cumulative rent growth reached 50% since 2010. While the nearterm outlook for multifamily rents is bleak, slow but steady increases are anticipated through the end of 2021. As more of the population is vaccinated and the economy reopens, rent growth is forecasted to coincide with what is legally permissible per Oregon’s rent control legislation, which tops out at 7% plus inflation. The rent increase percentage for the 2021 calendar year is 9.2%. As depicted, rent growth for the remainder of 2021 is nominal; however, assuming the economy reopens by year-end, rent growth commensurate with what is legally permissible is anticipated as landlords attempt to recapture lost revenue. As market recovery rebounds in 2022, rent growth is anticipated to slow and continue at a more moderate pace, in line with the two to three years pre-pandemic.
Asking rents have steadily increased over the past 10 years, with the first measurable dip occurring in Q4 2020/ Q1 2021. The largest decline is reflected in the studio and one-bedroom unit types. A clear trend of increased demand for larger units has emerged since the onset of the pandemic. With a significant portion of the population now working from home on flex schedules or on a full time basis, apartment tenants are seeking larger units that will accommodate a home office. For new construction, this changing trend is notable, and should be considered when determining unit mix. (Continues on the next page.)
White Oak Apartments - Located at 1881 Wiltsey Road SE, this project includes 111 units, including 24 one bedrooms and the remainder two-bedroom units. Construction was completed in November 2020, and the project was fully absorbed at Certificate of Occupancy. River Bend Road West Salem - Located at 1221 River Bend Road NW, this is a mixed-use development containing 48 apartment units with one and two-bedroom unit types. There are five buildings: three multifamily and two commercial/retail buildings. Completion is anticipated for spring 2021. Mixed-Use/Sonic River Apartments – Located at at 3675 River Road N in Keizer, this mixed-use project was completed in 2020 and includes five (fully leased) street level retail units and 13 one-bedroom upper-level apartments. The property is listed for sale at $3,750,000 and a 5.15 % OAR. Silverton Road & Lansing - 96-unit apartment complex comprised of eight, three-story buildings housing two and three-bedroom unit types and one manager’s office. Completion is anticipated for spring/summer 2021.
NEW CONSTRUCTION New apartment construction peaked in Q4/2018 and Q1/2019, with approximately 1,323 units. New development remained high throughout 2019, but tapered off in 2020. As of Q1/2021, there are 565 units under construction throughout the Salem/Keizer MSA. According to CoStar, local apartment inventory increased 13% over the past decade.
Broadway Apartments - Located at 990 Broadway Street NE, this is a 23-unit project at the northern fringe of the Salem CBD. This project includes a first-floor commercial component, 16 studio apartments, five one-bedroom units, and two twobedroom units. Construction is under way. The Grove – Located at 2110 Strong Road SE situated on the former Fairview Training Center site. The 180-unit project is currently under construction, and is comprised of one, two and three-bedroom unit types. Amenities include a pool, playground, a community garden, and a large grove of trees. Deliveries began in mid-2020.
New apartment development is slowing, as compared to 2018/2019; however, whether this is related to the pandemic, rent control, or a fulfilling of untapped prior demand, remains uncertain. New projects typically include upgraded interior finishes such as granite or quartz counter tops and enhanced appliance packages to include stainless steel finishes. In-unit washer/dryers have become standard in new projects. These amenities insure higher rent rates. Demand for new units remains high, despite the strong rent levels. Notable new projects currently under construction (or recently delivered) include, but are not limited to: KOZ on State – Located in the Salem CBD, this is a mixeduse project with 148 micro units and 5,300 SF of ground floor retail. Unit mix includes 10 two-bedroom units (with laundry in units), 10 one-bedroom units, and 128 studios. The project is nearing completion and is in lease-up.
Market participants report a lack of multi-family properties offered for sale. When properties do become available, investor interest and high demand has historically accelerated marketing/exposure time. Most investor grade multifamily properties rarely make it to the market. Rather they trade hands via broker-to-broker contact, without being officially listed. Further, buyers typically do not reflect institutional investors; rather, most buyers are local individual investors. Predictions suggest sales volume may slow, as buyers step to the sidelines to wait out the ripple effects of the pandemic. Sales volume faltered in 2020; however, the market sale price per unit steadily increased.
Most landlords are not raising rents during the pandemic. With no clear indication of when this will end, market expectations have tempered, which may lead to a leveling off of pricing. 2020 included 30 transactions, with an average sale price nearing $143,000 per unit and average capitalization rate of 5.9%.
Two transactions of note are:
Howard Commons sold in March 2020 for $17,000,000 or $202,380/unit and a 5.43% OAR. This is the second largest Salem/Keizer MSA multifamily transaction in the past decade. The 84-unit property is located in northeast Salem and was delivered in 2019. Swift absorption resulted in vacancy at the time of sale of only 2.4% after less than one year. Hazel Hollow Apartments (located in Jefferson) sold in December 2020 for $192,166/unit. The 30-unit property was constructed in 2020 and sold at 6.7% vacancy after a solid lease-up Mixed-Use/Sonic River Apartments
KOZ on State
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RESIDENTIAL OVERVIEW MIKE ERDMANN | CHIEF EXECUTIVE OFFICER HOME BUILDERS ASSOCIATION OF MARION & POLK COUNTIES
The residential construction market showed continued growth in 2020, largely fueled by historically low interest rates and benefitting from extraordinarily low inventory levels of existing for-sale homes. Sales of new homes increased 12% over the last year, with 831 new homes sold in 2020. While still below historical building activity levels of the 1970’s, 1990’s and 2000’s, 2020 saw the greatest number of new homes sales seen since 2006.
The home building industry was one of the few sectors of the economy that was largely untouched by the COVID-19 pandemic that clobbered so many other sectors of the economy. When COVID-19 began to dominate the news in late March, shutting down schools and businesses, permit activity dropped in the 2nd quarter of the year as builders were unsure if they would be able to continue building, or if the broader economy were going to collapse leaving them with inventory, they would be unable to sell. Fortunately, construction was soon deemed an essential activity by the State of Oregon and allowed to continue operating, and with buying activity spurred by low interest rates, construction activity bounced back quite quickly, more than making up for the 2nd quarter pause. In a way, residential construction has likely benefitted from the impacts of the pandemic elsewhere in the real estate market. Many prospective home sellers held off on putting their homes on the market, especially over the Spring and Summer months, concerned about the health risks of inviting potential buyers through
their homes. As a result, far fewer existing homes were listed for sale in 2020, leaving new construction with less competition from existing home listings amid a frenzied real estate market. Low inventory numbers continue to be a challenge for home buyers, with inventory dropping from a three-month supply at the start of 2020 to barely one month by the end of the year. Much of the frenzy in the real estate market is due to exceptionally low interest rates. Interest rates continued to drop throughout 2020, falling from about 3.75% at the start of the year to 2.75% by the end of December. Such historically low rates have provided substantial fuel to the already hot market, driving demand, and increasing sales.
Prices continue to increase, though less than the rapid 10-15% price increases seen in the 2015-2017 timeframe. The average new construction sale in 2020 came in at $387,713. On a price per square foot basis, prices increased 4.7% over 2019. Towards the latter part of the year, builders grappled with a significant runup in lumber prices that haven’t yet been reflected in the annual numbers. Between April and September, framing lumber tripled in price, putting significant price pressure on builders struggling to maintain housing affordability. While lumber prices dipped briefly in October, they returned to their near record highs by the end of the year and remain high as we enter 2021. Such record lumber prices will inevitably be reflected in higher sales prices going forward unless lumber costs come down.
As single-family homes become more expensive to build due to lot prices, fees and construction costs, multi-family construction continues to represent a greater and greater share of overall residential construction activity. For the first time in at least the last 25 years, more multifamily units were built in the region in 2020 than single-family units. With high lot prices forcing builders to build more expensive homes, and home prices escalating faster than buyer incomes, this trend is expected to continue into the future. Initial applications for new subdivisions in the City of Salem dropped significantly in 2020, with under 200 lots entering the pipeline. Of these, the larger projects include 73 lots on Old Strong Rd SE from Ward Development, 45 lots of RM-2 land on Liberty Rd S from Harrison Industries, 31 lots on Eagle Ridge Ave NW from Comfort Homes, and 29 lots on Doaks Ferry Rd NW from Trademark Enterprises. Despite the lack of new land division activity, the largest single-family projects continue to be in East and NE Salem where volume builders DR Horton and Forest Ridge Homes are active. Development site work has begun on the first 160 lots in the Eastpark subdivision, on the site of the old Pictsweet mushroom plant west of Cordon Rd between State St and Auburn. DR Horton is expected to build out the entirety of this eventual 600+ lot subdivision, with home construction anticipated to begin during the first half of the year. Much like their activity in the Northstar subdivision in NE Salem, DR Horton will be building smaller, more affordable new construction priced well below the market average. An unfortunate surge in construction activity is expected in the Santiam Canyon, as 630 homeowners lost their homes in the Beachie Creek and Lionshead forest fires this past summer. Given that 630 new homes are more than double the number of new homes permitted annually by Marion County, this new construction activity may strain the permitting process at Marion County and will exacerbate the already existing shortage of construction workers in the industry. Much will depend on how quickly affected homeowners start the rebuilding process, as many were uninsured, and many others are finding that their insurance policy’s replacement values are not enough to cover today’s construction costs.
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