Portland’s retail market is supported by steady employment gains that are luring new residents. Employers have created almost 23,800 jobs over the past 12 months, while the metro added nearly 27,400 people. This is a population growth rate that is nearly double that of the U.S. Household income also advanced at a faster clip than most of the country. Portland’s median household income jumped 5.3 percent over the past year. This is well above the national level of 3.6 percent, providing residents with more discretionary spending power. Retail sales have surged 5.8 percent year over year as a result, which is significantly higher than the U.S. rate of change. These growth trends are expected to continue through 2019, boosting the retail sector.
Adam Lewis, Marcus & Millichap
The need for retail space may be escalating, but construction remains measured. This has funneled expanding retailers into the dwindling supply of existing space as vacancy tightens. Developers added 319,000 square feet year over year in March, slightly lower than the 327,200 square feet 12 months earlier. Deliveries will remain sparse as builders have less than 300,000 square feet under construction. Much of the new supply is ground-level space in mixed-use office or apartment projects in walkable, urban neighborhoods.
Fewer completions over the past four quarters contributed to the vacancy rate hovering near the 12-year low at 3.4 percent in March. It has remained below 4 percent for six consecutive quarters. Vacancy in multi-tenant buildings posted the largest annual drop of 50 basis points to 3.4 percent. The single-tenant rate dipped 20 basis points, also ending the first quarter at 3.4 percent. Retailers vacating older space resulted in the average asking rent dipping minimally to $19.01 per square foot, year over year, following a 2.6 percent climb one year prior. Portland rents in the first quarter rested 1 percent below the cyclical high. This rate is expected to rise above the previous peak set in 2017 by year-end. The rate in multi-tenant buildings declined 2.7 percent to $19.05 per square foot during the year ending in March, while single-tenant rent rose 1 percent to $19 per square foot.
A tight supply of multi-tenant assets for sale limited the number of transactions over the past four quarters. The increased competition helped push the average price up 8 percent to $283 per square foot, with the average cap rate in the low 6 percent range. Trading velocity for single-tenant assets also declined slightly over the past 12 months as the average price rose 4 percent to $371 per square foot. Cap rates dipped 20 basis points to average in the mid-5 percent span. In the year ahead, retail assets with service or entertainment-based tenants that are more internet resistant will garner investors’ attention.
— By Adam Lewis, vice president and regional manager, Marcus & Millichap. This article first appeared in the July 2019 issue of Western Real Estate Business magazine.