commercial advisors, llc

ECONOMICFORUM 2020 SVN COMMERCIAL REAL ESTATE

SALEM CONVENTION CENTERWILLAMET TE BALLROOM 2ND FLOOR

200 COMMERCIAL STREET SE • SALEM, OREGON 97301

TITLE SPONSORFEBRUARY 12

COMMERCIAL ADVISORS, LLC

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7:30AM BREAKFAST SERVED

7:45AM PROGRAM BEGINS

9:30AM CONCLUSION

FORUML INEUP

WELCOME

MASTER OF CEREMONIES

TITLE SPONSOR

OFFICE

AGRICULTURE

INDUSTRIAL

RETAIL

MULTI-FAMILY

RESIDENTIAL DEV.

IT INERARY

MAYOR CHUCK BENNETT

TOM HOFFERT

TROY MACDERMID

CURT ARTHUR, SIOR

ERIC HENNY

ERIK ANDERSSON

CURT ARTHUR, SIOR

KATHERINE POWELL BANZ, MAI

MIKE ERDMANN

CURT ARTHUR, SIORMANAGING DIRECTOR

503.588.4146

NICK WILLIAMSADVISOR

503.400.7851

GEORGE GRABENHORSTSENIOR ADVISOR

503.588.7395

TOM HENDRIEADVISOR

503.588.7397

HEATHER MILLERSALEM OPERATIONS

503.363.0295

GREG HERBERT, SIORMANAGING BROKER, CCIM

541.912.3232

BARB ARTHURFINANCE & OPERATIONS

971.304.0689

RYAN OVERTONEUGENE OPERATIONS

541.345.2361

BILL RIFFLEPROPERTY MANAGEMENT

DIRECTOR971.304.0707

MIKE FULGAROADVISOR

503.588.8067

MEET OUR TEAM

US BANK800-872-2657 • WWW.USBANK.COM302 STATE STREET, SALEM, OR 97301TITLE SPONSOR

Aldrich503-585-7774 • www.aldrichadvisors.com 680 Hawthorne Avenue SE, Ste. 140 Salem, Oregon 97301

Cascade Capital Funding 503-990-6868 · www.cascadecapitalfunding.com960 Broadway St NE, Ste 2, Salem, OR 97301

CB | Two Architects503-480-8700 • www.cbtwoarchitects.com500 Liberty Street SE, Ste 100, Salem, OR 97301

CD Redding Construction503-854-0496 • www.cdredding.com2837 22nd Street SE, Ste 155, Salem, OR 97302

Dalke Construction Co. Inc.503-585-7403 • www.dalkeconstruction.com2180 16th Street NE, Salem, OR 97301

Fischer Hayes Joye & Allen LLC503-378-0220 • www.fhapc.com3295 Triangle Drive, Salem, OR 97302

Garrett Hemann Robertson PC503-581-1501 • www.ghrlawyers.com1011 Commercial Street NE, Ste 210 Salem, OR 97301

Grove Mueller & Swank503-581-7788 · www.gmscpa.com475 Cottage St NE, Salem, OR 97301

Home Builders Association of Marion & Polk Counties 503-399-1500 · www.homebuildersassociation.org 2075 Madrona Ave SE, Suite 100, Salem, OR 97302

MAPS Credit Union503-566-3444 • www.mapscu.com451 Division Street NE, Salem, OR 97301

Modern Building Systems, Inc. 800-682-1422 · www.modernbuildingsystems.com9493 Porter Rd SE, Aumsville, OR 97325

Northwest Farm Credit Services 503-371-3000 · www.northwestfcs.com650 Hawthorne Ave SE, Ste 210, Salem, OR 97301

Pence Construction503-399-7223 • www.pence.net2747 Pence Loop SE, Ste 100 Salem, OR 97302

Powell Banz Valuation LLC503-371-2403 • www.powellbanz.com2925 River Road S, Ste 270, Salem, OR 97302

Rich Duncan Construction, Inc. 503-390-4999 · www.richduncanconstruction.com2295 Rural Ave SE, Salem, OR 97302

Saalfeld Griggs PC503-399-1070 • www.sglaw.com250 Church Street, Ste 200, Salem, OR 97301

THANK YOU SPONSORS!This section has been created to give you easier access when searching for a trusted commercial real estate affiliate. Take a minute to familiarize yourself with our sponsors. These local businesses are proud to partner with us to make this event possible. Please support these businesses and thank them for supporting the commercial real estate community!

Salem Business Journal503-365-9544 • www.salembusinessjournal.comPO Box 93, Salem, OR. 97301

Salem Chamber of Commerce 503-581-1466 • www.salemchamber.org1110 Commercial Street NE Salem, OR 97301

SEDCOR 503-588-6225 · www.sedcor.com626 High Street NE, Suite 200, Salem, OR 97301

Sherman Sherman Johnnie & Hoyt LLP503-364-2281 • www.shermlaw.com693 Chemeketa Street NE, Salem, OR 97301

Studio 3 Architecture503-390-6500 • www.studio3architecture.com275 Commercial Street NE, Salem, OR 97301

Willamette Community Bank503-468-5558 • willamettecommunitybankcom.com315 Commercial Street SE, Ste 110, Salem, OR 97301

White Oak Construction503-588-3081 • www.whiteoakconstruction.net2455 River Road S, Salem, OR 97302

MAYOR CHUCK BENNETTWELCOME

Salem Mayor Chuck Bennett took o�ce January 4, 2017. Serving his first term as Mayor, his record of nine years on City Council and dedicated service to Salem resulted in street improvements, the sidewalk replacement program, increased funding for public safety, and other livability initiatives. Mayor Bennett is a former State Representative and a graduate of Willamette University. He is married to Cherie, has one daughter, and lives in northeast Salem. Professionally, Mayor Bennett was a government a¢airs representative for public school leaders for more than 18 years and owned his own government a¢airs business prior to that. He also worked as a newspaper reporter and editor in the 1970s and early 1980s. In his tenure as a volunteer with the City of Salem, Mayor Bennett served as president of the City Council and chaired several City Council committees, including the Salem Public Library Board, Cultural and Tourism Promotion Advisory Board, Budget Committee, and Planning Commission. He is also a former board member of the Pentacle Theatre and the Oregon Council for the Humanities.

TOM HOFFERTMASTER OF CEREMONIES

Tom Ho¢ert serves as CEO of the Salem Area Chamber of Commerce. Prior to the Salem Chamber, Tom spent 14 years in food manufacturing, distribution, and customer fulfillment at Don Pancho Authentic Mexican Foods. Tom is a graduate in Business from Western Oregon University and also has his certificate in Nonprofit Management from the U.S. Chamber of Commerce. Tom is active in local politics and a strong advocate for small business in Oregon. In his leisure, Tom serves as a high school, collegiate, and professional lacrosse o�cial and sits on the national subcommittee for o�cials within U.S. Lacrosse. Tom was born and raised in Salem and resides just outside of the downtown area with his dog Laci.

CURT ARTHUR, SIOROFFICE AND RETAIL MARKET | SVN COMMERCIAL ADVISORS LLCCurt Arthur, SIOR, serves as a Managing Director for SVN Commercial Advisors LLC, in Salem, Oregon. He has over 30 years in the industry and specializes in larger oce and industrial sales and leases throughout the Mid-Willamette Valley. He is the only member of the Society of Industrial and Oce Realtors (SIOR), one of the industry’s most prestigious designations, in the Mid-Valley. He has repeatedly obtained Partners Circle status with SVN International as one of the top 1% of advisors worldwide. Curt takes great pride in his service to his community and to his industry.

MIKE ERDMANNRESIDENTIAL DEVELOPMENT | HOME BUILDERS ASSOCIATION OF MARION & POLKMike Erdmann is the Chief Executive Ocer of the Home Builders Association of Marion & Polk Counties, which represents more than 700 businesses involved in every aspect of the residential and light commercial development industry throughout the greater Salem region. Mike started with the Home Builders Association in 1991, and has more than 25 years of experience working with the building industry in areas such as growth management policies, land use planning, transportation and other code issues. He has a Political Science degree from Oregon State University and worked in the Oregon legislature before starting with the Home Builders Association.

ERIC HENNYAGRICULTURAL MARKET | NORTHWEST FARM CREDIT SERVICESEric Henny is a relationship manager based in Northwest Farm Credit Services’ Salem, Oregon, oce. For 14 years, he has assisted with the capital needs of his customers in the Willamette Valley’s diverse agriculture community. Eric’s focus is on hazelnut, grass seed, nursery and dairy farm producers and processors. Eric was born in the Salem area where he was raised on his family’s nursery operation. He earned his degree in agriculture business management with a concentration on economics from Oregon State University. He joined Northwest Farm Credit right out of college. Eric and his wife have three young children and own a 70-acre “hobby farm.”

KATHERINE POWELL BANZ, MAIMULTI-FAMILY MARKET | POWELL BANZ VALUATION, LLC.Katherine Powell Banz, MAI is a Principal and Certified General Appraiser with Powell Banz Valuation, LLC. Katie is licensed in Oregon and Washington and has performed a diverse range of commercial valuation as-signments throughout the Northwest since joining the firm in 2002. In 2014 Katie and her husband, Jonathan Banz, MAI, AI-GRS, purchased the business and rebranded the company Powell Banz Valuation, LLC. Katie’s professional experience includes a wide variety of valuation-related work, including consultation, appraisal, expert witness testimony, appraisal review, and feasibility analysis of income producing properties; including retail, oce, development land, industrial, single and multi-family residential, and special use properties such as churches and schools. Katie was the 2018 President of the Greater Oregon Chapter of the Appraisal Insti-tute (GOCAI). She has been an active GOCAI Board Member since 2012.

ERIK ANDERSSONINDUSTRIAL MARKET | SEDCORErik Andersson is the president of Strategic Economic Development Corporation, a nonprofit organization of business and community leaders committed to the economic vitality of Marion, Polk and Yamhill counties. With more than 30 years of experience in economic development, Erik’s background includes work in the utility industry, serving as economic development manager for Tacoma Public Utilities and Pacific Power. He also was the regional coordinator for Oregon Gov. Ted Kulongoski’s Economic Revitalization Team and a Business Development Ocer with Business Oregon. His volunteer work in economic development includes serving as a SEDCOR board member; as a president for Oregon Economic Development Association; chair for the Oregon Infrastructure Finance Authority; and a board member of Restore Oregon and Rural Development Initiatives. In 2014, Erik was awarded the Oregon Economic Developer of the Year.

FORUMSPEAKERS


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O F F I C ECURT ARTHUR, S IOR

MARKET OVERVIEW

SUMMARYAs Oregon’s state capital, virtually all of Salem’s largest o�ce tenants are government entities making the state the driving force in the o�ce market along with the growth in medical services. About a quarter of Salem’s work-force is employed by government. By contrast, only about 16,000 people are employed in the professional or business services sector.

Construction levels have consistently been below the metro’s historical average throughout the post-recession era. This limited construction reduces supply-side impacts on vacancies, which have steadily tightened over five years.

LEASINGSeveral years of positive net absorption has reduced our overall vacancy rate to just 4.5%. The leasing market in 2019 remained robust but the over-all deal size was at its lowest level in years with just a half a dozen new of-fice leases exceeding 10,000 SF. Salem is influenced by a high proportion of older inventory with o�ce rents just 70% of Portland’s average rent and a mere 55% of the national rent. According to CoStar, Salem has no 5 Star o�ce buildings and few 4 Star o�ce buildings; there is less than 10% as much 4 Star inventory as there is 3 Star inventory.

Rents continue to rise dramatically in this environment of scarcity. Overall rent growth climbed 5.5% with 4 Star inventory (Class A) jumping 6.5%. The largest leases in 2019 were again dominated by the State of Oregon. The Oregon Treasury has pre-leased new construction in the 700 block of Hawthorne Ave SE; the Oregon Supreme Court temporarily relocated o¢ the Salem Parkway for two years; and the Department of Human Services leased 17,884 SF at the 1660 Oak Street building.

NET ABSORPTION

SALESWith sales volume over $50 million, sales volume in 2019 was exception-ally strong. Transactions, which seldom exceed $5 million, mostly involve older properties under 20,000 SF. The largest sales over the last five years have typically involved medical o�ce buildings, but that was not the case in 2019. Last year continued a trend of out of market investors acquiring key assets within the market. In November, the four-building Creekside Corporate Center, totaling 99,365 SF, sold for $21.75 million ($219/SF) at a 8.25% first year cap rate. The four buildings were constructed from 2000 through 2008. Peregrine Realty Partners acquired the property from Sage Properties. In August, the 30,000 SF 1900 Hines St. SE sold for $5.5 million ($182/SF) at a 6.53% cap rate in an investment triple net transaction. Com-mercial Property Resources, Inc. bought the multi-tenant asset from a Sa-lem-based individual investor. In March, the 13,000 SF Silverton Specialists Center, delivered in 2002, sold for $4.5 million ($346/SF). In July, 40,000 SF 3700 Portland Road NE sold for $4 million ($100/SF). Freeman Motor Com-pany, the building’s existing tenant, exercised an option to buy the asset. SVN was proud to have brokered 3 of the 4 sales.


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O F F I C ECURT ARTHUR, S IOR

SALES VOLUME & AVERAGE PRICE PER SF

MEDICALSalem Health has made major announcements in 2019 that will have dramat-ic impacts on health care delivery in our market. First came the announce-ment that the hospital is planning a new seven-story, $235 million building expansion that will add 150 beds to its facility by 2022. This expansion will increase the bed count to 650, the largest in the State of Oregon. Next came the announcement of new outpatient surgical centers to be developed at the site of the former Northbank Plaza, directly across Shelton Creek from Building B at the hospital; and at the site of the former Salem Health Reha-bilitation facility at Center Street & Medical Center Drive. The first is a joint venture with Salem Clinic and Willamette Ear, Nose & Throat and the second is in partnership with Hope Orthopedics.

December saw the announcement of Salem Health’s acquisition of WVP Medical Group and the grand opening of Salem Health’s brand-new 31,000 SF medical clinic in Woodburn o¢ering family medicine, urgent care, lab and imaging services and specialty services including physical therapy, OB/GYN and other maternal services.

NOTABLE TRANSACTIONS

THE BRIDGE AT MILL CREEK (LEASE)SITE: 700 BLOCK HAWTHORNE AVE SE, SALEM ORTENANT: STATE OF OREGONLANDLORD: PJS LAND DEVELOPMENT, LLC

CREEKSIDE CORPORATE CENTER (SALE)

SITE: 650-680 HAWTHORNE AVE SE, SALEM ORSIZE: 99,365 SF | PRICE: $21,750,000 ($219/SF – 8.25% CAP)BUYER: PEREGRINE REALTY PARTNERSSELLER: SAGE PROPERTIES, LLC

MAPS CREDIT UNION ANCHORED OFFICE (SALE)

SITE: 1900 HINES ST. SE, SALEM ORSIZE: 30,194 SF | PRICE: $5,500,000 ($182/SF – 6.53% CAP)BUYER: KERLEY COMMERCIAL, LLCSELLER: S/R DEVELOPMENT PROPERTIES, LLC

CHART

GRAPH

A G R I C U L T U R EERIC HENNY

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AGRICULTURE OVERVIEW

2019 RECAP2019 Willamette Valley agriculture will be remembered for the emergence of Hemp as a deregulated crop and the bankruptcy of one of Oregon’s most well-known cooperatives, NORPAC. At its core however, agriculture continues to be stable and profitable for most commodities grown in the region. At Northwest Farm Credit Services, we continue to see strong results among customers and excellent credit quality that support a profitable phase in the region.

The strongest performing crops in the Willamette Valley for 2019 are Greenhouse/Nursery, Grass Seed, Wine Grapes, Christmas Trees and Hops. These represent nearly $2 billion in economic output and 34% of Oregon’s overall farmgate. Other key crops in the Valley such as Berries, Hazelnuts and Dairy have seen margin compression at the farmgate relating to a strong US dollar, trade pressures and/or oversupply.

REAL ESTATE TRENDSThe past decade has seen an influx of outside capital into the Willamette Valley as equity groups and producers from outside of Oregon look to invest in permanent plantings and high value irrigated land. This interest has been mirrored by established operators looking to deploy earnings and equities into expanding their operations, further contributing to increased land values for the region.

Despite high interest, the volume of sales in the region are nearing recessionary lows due to a lack of inventory on the market.

*These charts were compiled by Northwest Farm Credit Services appraisal sta¢. Sales reflected in the data have been allocated to the land class excluding the influence of improvements, homesites and other factors.


Solid earnings and minimal debt among property owners limit their desire to sell, yet returns per acre have restricted continued price increases. In comparing the NASS average rent paid for the Willamette Valley; non-irrigated crop land increased $21/acre over the past ten years and $33/acre for irrigated cropland. Rent as a percentage of average market value per acre tightened from ~2.4% in 2010 for both to 1.73% for irrigated cropland and 1.57% for non-irrigated cropland. The failure for rents to maintain pace with market value gains is further evidence of margin compression for area farmers as land, labor and regulations tax revenues.

Currently, 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.

VEGETABLE ACRESThe loss of NORPAC and its impact on the economics of the Willamette Valley are not fully realized. One of the immediate questions for farmers is what impact on cropping acres will be for the coming year. Per NASS, 2018 there were 40,400 acres of sweet corn and green beans grown in all of Oregon. NORPAC is not the only processor of vegetable acres in the state and while some of its acres will go into other crops some/many will stay in vegetables into the future. It is probable that 10-20,000 acres will shi² into other crops in 2020, or may have already done so in 2019.

For perspective, Oregon farmers grow over 300,000 acres of tall fescue and perennial rye grass seed, 80,000 acres of hazelnuts and 63,000 acres of wine grapes.

*NASS/ODA did not report acres in production in some years creating gaps in the data

GOING FORWARDWillamette Valley farmers are well positioned heading into 2020 but have expressed key concerns relating to rising costs, labor and increased regulations that jeopardize returns. This is pushing producers to seek crops that promise stronger margins and have proven willing to invest capital reserves into those industries. The Hazelnut industry has seen an expansion of 51,000 acres of new orchards in the past 12 years or around $255 million in orchard investments.

Oregon’s registered hemp acres went from 3,000 in 2017 to over 60,000 acres in 2019. While not all those acres were planted and even less successfully harvested, it is estimated that producers of hemp invested between $260-$520 million into growing the 2019 crop and still seek an answer for margins.

I N D U S T R I A LERIK ANDERSSON

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GRAPHGRAPH

MARKET OVERVIEW

2019 SUMMARYFor industrial property, supply is catching up to demand, with projects and developers continuing to look to the Mid-Willamette Valley for available, a¢ordable space. Benefiting from strong demand, vacancies have significantly tightened over the past few years and are beginning to stabilize. Though annual rent growth has recently compressed, the rate of increase is comparable to the long-term average.

Amazon’s one million square foot fulfillment center in the Mill Creek Corporate Center began hiring employees in earnest over the summer, 2019. Employment is expected to reach 1,000 at the facility. In July, the building sold for $105.5 million, marking Salem’s largest-ever industrial deal; in contrast, the metro region’s historical average for industrial sales volume is around $25 million.

Portland has seen a rise in speculative developments. Of the 3 million square feet of space under construction in the Portland region, nearly 80% is available for lease, and rent gains there are beginning to moderate. How and when those factors will impact Salem’s industrial market remain to be seen.

2019 ACTIVE PROJECTSCoStar reports that just three projects are under construction across Salem; by contrast, nine assets came online in 2018, including the biggest industrial delivery Salem has ever seen (Amazon). Four new PacTrust buildings are coming online at the Mill Creek Corporate Center including more than 60,000 SF for Raw Advantage Processing. 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.

Activity continued at the former Panasonic building in Salem over the past year, with a new tenant expected to be officially announced in early 2020. The 130,000 SF building was purchased by the Reich Brothers in 2018. The $300 million Mint Valley Paper project, announced in 2019, is expecting to see a groundbreaking in Dallas, Polk County, in early 2020. The project will create an estimated 120 jobs. In 2019, NORPAC, the state’s largest food processing employer, announced its closure, impacting facilities in Stayton, Brooks and Salem. In January, 2020 cold storage giant Lineage Logistics bid to acquire all of these assets was approved and subsequent agreements are in place with PNW Veg Co.,

LLC, a part of Oregon Potato Company, to occupy one or more of the facilities to continue processing and packaging.

RENT OVERVIEW

Salem industrial market rents have increased by about 47% since the beginning of

the decade and are now around $7.75/SF. CoStar forecasts that industrial rents will

be relatively stable, with rates increasing to $8.27 by 2024. Over the past decade,

the region has gone from negative performance to annual rent gains at a rate of

over 6% from 2014 to 2018. Rent growth in 2019 has dipped slightly, and Salem’s

rent remains at a price advantage compared to Portland Metro, where the average

rate is 15% higher at $9.00 per SF. There remains a significant gap between rates

within the Salem Metro region, with close to a 35% price di¢erential for industrial

space in Marion County over Polk County. The average industrial market rent in Polk

County is $5.77 per SF. Yamhill County, on the other hand, features slightly higher

Market Rent Per SF

$6.60

$6.80

$7.00

$7.20

$7.40

$7.60

$7.80

$8.00

$8.20

$8.40Forecast

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© 2020 CoStar Realty Information Inc. 01/07/2020


average industrial rent than Salem at $8.31 per square foot. Demand for industrial

space in the Salem market has been impacted by the relatively higher rates in

Portland, where industrial rent performance fell slightly toward the end of 2019. Due

to new, speculative developments remaining on the market, along with a heavily

speculative pipeline, rent gains in Portland may see further moderation in 2020.

Rent growth in logistics, once the best-performing industrial property type, have

fallen to 3% from a peak rate of 8% in 2016. Given the impact of the logistics sector

to economic development activity in the Salem Metro region, it will be interesting

to see if a similar growth slowdown occurs here in the future.

INDUSTRIAL VACANCY RATE

The Salem region began the last decade feeling the lingering effects of the recession, with an industrial vacancy rate of nearly 13% at the end of 2010.At the end of 2019, that figure is 3.6%, slowly rising from a low of 2.7% in

I N D U S T R I A LERIK ANDERSSON

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2016, reflecting the increased regional demand and relative lack of supply. CoStar forecasts the region’s industrial vacancy rate to be relatively stable

in the 4-5% range through 2024.

QUICK MARKET FACTS

In summary, the Market Quick Facts indicate a market beginning to find stability a²er

several years of an imbalance from the supply and demand standpoint. While there

was an increase in the availability of vacant square feet to over 912,000 SF in 2019, that

figure will no doubt be impacted by reuse of the former Panasonic building in Salem.

A²er some relatively significant increases in rent in the middle of the past decade,

rates have stabilized over the past three years.

2019 NOTEWORTHY PROJECTS

PACTRUST

63,000 SF building for Raw Advantage and 62,500 SF speculative building at the Mill

Creek Corporate Center.

FORMER PANASONIC BUILDING

129,850 SF industrial/o�ce on nearly 20-acre site in Salem’s Renewable Energy and

Technology Center. New tenant announcement expected in early 2020

Vacancy Rate

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%Forecast

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© 2020 CoStar Realty Information Inc. 01/07/2020

AVAILABILITY 2019SURVEY

2018 SURVEY

2017 SURVEY

RENT PER SF $7.75 $7:86 $7.15

VACANCY RATE 3.5% 2.5% 1.7%

VACANT SF 912,000 615,622 389,998

AVAILABILITY RATE 4.6% 4.6% 4.6%

AVAILABLE SF 1.2 MILLION 1.1 MILLION 1.66 MILLION

SUBLET SF 113,000 40,000 42,606

MONTHS ON THE MARKET 4.9 5.3 2.9


R E T A I LCURT ARTHUR, S IOR

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MARKET OVERVIEWDespite tight vacancies, the retail outlook in Salem is mixed. Few large leases were signed, but positive absorption is consistent despite some notable store closures. Rent growth, not especially strong at any point in the past decade, remains low, and rates have seen a cumulative increase of about 10% since bottoming out in 2012 according to CoStar. Developers have largely focused on build-to-suits or smaller infill opportunities. Post-recession, no year has reached 100,000 SF in new deliveries. Though assets are occasionally swept up into large bulk portfolio deals, Salem investment is largely regional and smaller-scale.

In December came the news that both Starbucks and TJ Maxx were vacating locations in downtown for a mix of reasons. The Starbucks location will be backfilled by local merchant Bentley’s Co¢ee with three locations in the market and TJ Maxx will remain in the market but relocate to a yet to be announced location o¢ Lancaster Drive. CONSTRUCTIONSince the recession and the increase in online retail shopping there has only been a 1.5% increase in existing retail inventory in the Salem/Keizer market. The Pointe at Glen Creek, a 31,000 SF development delivered in 2019, is a speculative project which is rare for Salem. Most recent projects of significance are standalone build-to-suits with the most noteworthy being the unbelievable fanfare surrounding the areas first In-N-Out Burger located at Keizer Station in December. Six standalone Dollar General stores, about 9,000 SF each and sprinkled throughout the metro, were delivered between 2017 and 2019. Carmax, with 180 locations nationwide, opens on Lancaster in March 2020. Since the recession, no new retail deliveryhas reached 40,000 SF.

VACANCY & ABSORPTIONThe lack of new construction puts downward pressure on vacancy which finished the year at just 2.9% for the Salem/Keizer market and just 2.46% for the metropolitan area including markets such as Independence to Stayton according to our survey using CoStar data.

On the positive side Salem’s 81,000 SF of positive absorption contrasted to markets l ike Portland (-507,000 SF) and Eugene (-57,000 SF) who both saw negative absorption in 2019.


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RENT GROWTHThe market experienced declining average rents in 2017-18 but rebounded and grew 2.5% in 2019. Since 2013 retail average rents have only cumulative seen a 10% increase. Retail rates are a bit higher in Marion County than in Polk County and there is a 25% premium for mall space over the metro’s average retail rate.

Rents vary widely based on the age and location of a property and there is a significant delta in rents between newer and older product. The average retail rents in Salem finished the year at $14.97 per SF, per year, but current listings of the newest projects in South Salem are commanding up to $28/00 per SF.

SALESWhile 2019 saw some larger trades, over the prior year, no single buyer or seller traded over $8 million in assets. The market cap rate has hovered near 7% for the past few years.

Two Safeway grocery stores each traded twice in 2019. In June, Albertsons sold 50 stores in a sale-leaseback deal that included two locations in the Salem metro, a 43,000 SF store at 1535 N First St. in Stayton and a 49,000 SF store at 1265 Center St. NE in Salem. The total portfolio was $622 million and the estimate of the combined value of these two locations was $18.4 million. Within three months, both local Safeway stores sold again, priced at $11.1 million each. This time, each asset was purchased by an individual investor in California. The net leased Planet Fitness at 5240 Commercial Street SE sold in December for $4.9 million which yielded a 7.59% cap rate.

2020 FORECASTWe predict the three significant vacancies in the Lancaster area (former Toys R Us, Shopko and Sears) to be leased during the calendar year with one being the landing spot for TJ Maxx who is relocating from downtown Salem. In the downtown corridor expect continued struggles, especially in the north around the Salem Center, until the governmental agencies can cra² a meaningful plan to decrease the amount of homeless who continue to sleep around some major retail locations.

Early in the year we should know the fate of Costco’s planned relocation to Kuebler which has been slowed by appeal. A user is already in tow for the existing location on Mission should the land use be approved.With no new construction of an consideration we expect continued downward pressure on vacancy and with rents rising 2-4% during the year.

NOTEWORTHY PROJECTS

SUNNYSLOPE SHOPPING CENTER455 L IBERTY ST. SE , SALEM ORSize: 93,297 SF | Price: $11.425 million (7.55% Cap Rate)Seller: Liberty Square Associates | Buyer: CH Sunnyslope, LLC PLANET F ITNESS5240 COMMERCIAL STREET SE , SALEM ORSize: 23,910 SF | Price: $4,900,000 (7.59% Cap Rate)Seller: United Growth Holdings | Buyer: Undisclosed


M U L T I - F A M I L YKATHERINE POWELL BANZ, MAI

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MARKET OVERVIEW

2019/2020 MULTI-FAMILY MARKET UPDATE The multi-family sector continues to perform well in Salem/Keizer and throughout the Willamette Valley, with an average 2019 vacancy rate of 2.13%, as reported by Powell Banz Valuation, based on data gathered in the fourth quarter 2019. This is below the reported average vacancy rate in Portland and the national average.

Market participants and property managers report continued overall low vacancy, with nominal turnover and waiting lists for available units.

Breaking down the data into mature (constructed prior to 1990) and contemporary (constructed after 1990) complexes indicates there is continued demand for existing and new units. In 2019, the average vacancy in mature complexes measured 2.68% versus 1.70% in contemporary properties. According to CoStar and other market indicators, vacancy is forecasted to slowly increase over the next few years, as the planned and developing inventory is brought to market. However, the anticipated vacancy remains below the 5% industry benchmark.

Annual rent increases in Salem/Keizer averaged between 10% and 14% between 2015 and 2018. Rent appreciation continued in 2019; however, the velocity of appreciation slowed considerably, averaging 5% overall amongst all unit types. This is below the cap imposed by the new rent control legislation (7% plus inflation), and significantly less than the appreciation experienced in prior years. The greatest increases occurred in studio and two-bedroom units.


M U L T I - F A M I L YKATHERINE POWELL BANZ, MAI

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Average rents in 2BR/1Bth units crossed the $1,000 per month barrier in 2019. While rents have steadily increased, they remain roughly 35% lower than in the Portland market (per CoStar), which suggests in-migration will continue. Salem/Keizer is at-tracting more national (Amazon) and regional (In-N-Out) commercial/industrial ten-ants, resulting in the need for additional supporting housing units.

As of fourth quarter 2019, 2,000 multi-family units were in various stages of planning and construction. Of those, 604 new units are currently being developed in Salem/Keizer, with another 1,396 units in planning, review, and permitting. With the influx of additional supply, vacancy is anticipated to increase incrementally as the need for additional units is filled.

Absorption remains positive and has ranged from five to 20 units per month in five newly constructed apartment projects brought to market in the past year. The proj-ects are located throughout Salem, including the South, West, Northeast, and Central submarkets. The average overall absorption was 11 units per month in 2019. Most prop-erties being developed are preleasing, with full absorption expected upon completion of construction – or shortly therea²er. While the high returns on investment that had been commonplace in prior years are no longer guaranteed due to the increased cost of construction, scarcity of land, and increased borrowing costs, developers continue to reap the benefits of low vacancy and positive cash flows.

The average market sale price for apartments within the Salem/Keizer MSA was $120,881 per unit in 2019, according to CoStar. This reflects an increase overall when compared to prior years. The low sales volume in the fourth quarter of 2018 is a reflection of market uncertainty surrounding the impact of the new rent con-trol legislation. However, with continued price appreciation – particularly in newer construction – sales volume was strong in 2019.

With increased rents and continued positive cash flows, it is not surprising to see the market respond with higher prices. Stabilized new construction is a clear draw for investors who are willing to scratch the ceiling with regard to price per unit. However, the local Salem MSA typically garners individual investor buyers from the region rather than larger institutional investors, despite the strong rent growth and clear demand. Most properties continue to be sold to buyers who proactively seek out opportunities, contacting owners of properties that are not listed, or via brokers who can match buyers and sellers prior to listing a property. According to Costar the average Salem/Keizer apartment capitalization rate was 5.9% in 2019.

The Salem/Keizer multi-family market continues to exhibit strong fundamen-tals, including rising rents and vacancy well below the industry benchmark. The community has responded with significant additional product in the past three years, and an additional 2,000 units are in the pipeline. The overall outlook for the multi-family sector is positive.

R E S I D E N T I A L D E V E L O P M E N TMIKE ERDMANN

BIOPIC

RESIDENTIAL OVERVIEW

The mid-valley region’s new home construction market in 2019 was largely reflective of the struggles facing the housing market nationally: strong new home sales, countered by very low inventory and a shortage of build-ing lots that is allowing only a partial recovery from the last downturn. Sales of new homes were exceedingly strong in 2019, showing significant growth over 2018. 696 new homes sold in the Salem MSA in 2019, a more than 50% increase over the 450 new homes that sold the year prior. While it would be easy to chalk this increase up to the presence of large national and regional builders in the Northstar subdivision which came on line in NE Salem at the start of 2019, surrounding communities outside of Salem and Keizer experienced similar increases in new home sales, with Dallas, Turn-er, Independence, Aumsville and Sublimity all seeing significant growth in residential construction.

Prices continue to increase, though perhaps not at the rates that were seen two or three years ago. The average 2019 new home sale averaged $193 per foot, though this $193 per foot number is somewhat weighed down by the sheer number of sales of lower priced product in the Northstar Subdi-

vision. Excluding sales in Northstar, the market’s average sales price for new construction was $198 per foot, which represents a 5% increase over the year prior. This increase is significantly less than the 10 – 15% annual increases seen between 2015 and 2017.

As new home sales have increased dramatically this past year, inventory numbers have dropped significantly. At the end of 2018, the inventory of new homes had grown to a 6.1-month supply, partially due to rising inter-est rates in the latter half of 2018 that cooled sales. Interest rates have dropped significantly since late 2018, fueling the run in new home sales. As of the end of the year, we sit at about a 3 month supply of new construction inventory, near record lows. Contributing to the low inventory numbers is a significant shortage of building lots. This is a problem facing builders across the country, but the problem is particularly acute in the Salem area due to the land that’s theoretically available for development not being de-veloped due to cost. The vast majority of vacant residentially zoned land inside the Urban Growth Boundary have significant and expensive chal-lenges associated with development, whether that be di�cult regrading of hilly land in West and South Salem or costly infrastructure needed to serve the site.

R E S I D E N T I A L D E V E L O P M E N TMIKE ERDMANN

BIOPIC


Despite the increase in new home sales this past year, applications for sub-division development decreased from the year prior. In 2019, applications were submitted to the City of Salem for only five subdivisions containing 255 lots. Mountain West Investment applied for 45 lots o¢ Center St at the former state hospital, Pacific National Development applied for both a 22 lot and a 24 lot subdivisions in South Salem, and HSF Development applied for an 80 lot subdivision across Orchard Heights from West Salem High School, and an 84 lot subdivision in South Salem between Rees Hill Rd and Creekside Golf Course. This subdivision will result in Lone Oak Rd being extended and connecting to Rees Hill Rd, which should open up additional development land in the nearby area.

Partly as a result of the costs of developing land in Salem, the region is see-ing an increasing share of residential single-family development take place in surrounding communities. Salem’s expensive-to-develop land, combined with the City’s di�cult and slow development approval process and higher System Development Charges (SDCs) make it increasingly di�cult to build

a¢ordably priced housing, and so both developers and home builders are gravitating to these communities where homes can be built more a¢ord-ably. In 2019, more new single-family homes were built in surrounding communities than they were in Salem and Keizer. This trend of more de-velopment activity taking place outside of Salem and Keizer is expected to continue as land in Salem becomes increasingly di�cult and costly to develop.

The passage of House Bill 2001 in the 2019 Oregon Legislature will o¢er investment opportunities in future years that may help to supply more af-fordable housing in the area. House Bill 2001 requires cities over 25,000 in population to allow for duplexes, triplexes, quadplexes or cottage clus-ters on any residentially zoned single-family lot. Cities between 10,000 and 25,000 in population will be required to allow for duplexes on all sin-gle-family lots. Cities under 25,000 in population have until June 30th of 2021 to amend their codes to allow for duplexes, and cities over 25,000 in population have until June 30th of 2022. Salem Planning sta¢ have given indications that it will take them until early 2022 to make the required code changes, so these opportunities are still at least two years away, but we are already hearing from property owners and small developers who have expressed interest in pursuing these opportunities.

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