Terry Phillips
is owner of The Phillips Group, a firm specializing over the last 25 years in all aspects of commercial and investment property.
There has been a quiet but monumental change in the Clark County/Portland Metro commercial investment market. Several factors have come together to form a market with little supply and good demand. Positive migration, low interest rates, planning issues, cost of construction and a growing interest from investors looking at Clark County make it a great time for sellers and an interesting, if not challenging, time for investors in all sectors.
Just a few years ago it was uncommon to see capitalization rates below 7 percent; we now see 4 percent to 7 percent capitalization rates. With commercial interest rates above 7 percent, investors are seeing a cut in their cash returns. In the 1990s one could expect a 7.5 percent to 10 percent cash return. Today it’s not unusual to see 3.5 percent to 6 percent returns for trophy properties.
Three factors determine value and cash flow – income, expenses and interest rate. In today’s market we are seeing negative leverage and an interest rate higher than the property capitalization rate, but that has not stopped investors looking for well located and nicely maintained investment property.
Add to this mix a renewed interest in small businesses wanting to purchase their own property rather than lease. These buyers are more interested in how they can use the property rather than cash flow and therefore the property commands a higher price.
After experiencing several real estate cycles in the last 25 years, my concern is how future value of an investment property will be impacted with higher interest rates.
With that said, we are still in one of the hottest markets in 20 years.
Here’s how I see it:
Retail
• Vancouver’s retail lease market is especially active. Prospects want and will pay for good locations. Secondary locations are not commanding higher rents – yet.
• Retail property for investors has a strong demand.
• It is a seller’s market.
Office
• The leasing market is experiencing a comeback from high vacancies of 2003-2004. As Vancouver’s job growth climbs, so does its office market.
• Look for rents to increase in smaller B and C properties.
• Plans for continued long-term improvements in the downtown market are attracting small office user-owners and developer interest.
• Leased office properties are hard to find for investors.
Industrial
• Industrial sector prices have taken a jump in the last 12 months.
• A smaller and stronger industrial subtype is incubator space. Especially in high demand are well located small industrial properties for owner/users.
• Industrial condos aimed at small- to medium-sized business will be online soon.
Multi-Family
• As Vancouver continues to grow, it creates a demand for condominium and apartment development but not at the same rate as the 1990s.
• Vancouver continues to experience investor interest and activity with good projects hard to find.
• Buyers have offered record-breaking prices for well located apartment properties in the Vancouver/Portland market.
When we look at the overall market, investment sales in all product types are still commanding high prices with trophy properties in high demand. This is one hot market if you price the property fairly. And, if you want to re-invest, be ready to look outside Clark County for that next great investment.
Click here for a full real estate and development mid-year review.
