As 2020 mercifully concludes, a clearer picture is emerging of the outlook for the local real estate market in 2021. COVID-19 cases are spiking in the region as promising vaccination news arrives, civil unrest continues and businesses struggle under heightened pandemic restrictions. Plus, various protections for local real estate owners and occupants will lapse in the coming weeks and months. Following is a summary of trends, concerns and considerations as we move into a new year.
Downtown office leasing lags while suburban markets see increased demand
On the heels of stay-at-home orders, months of protests and small business failures, the downtown Portland office market has seen a considerable increase in vacancy rates. With more office product coming online in 2021, downtown vacancy is likely to increase, as absorption remains slow and rental rates remain flat. Challenges in downtown might continue if ongoing restrictions that hinder the operation of nearby retail and restaurant amenities are not relaxed. Also, ongoing unrest threatens to prolong the struggles of Portland’s hotels, which have one of the lowest occupancy rates in the nation.
Leading brokers in the downtown office market report that long-term deals are rare and touring activity is slower than ever. While some users look for larger spaces to accommodate socially distanced office work or a return to normal operations after a vaccine is widely available, many tenants with expiring leases have opted for short-term extensions or downsizing to assess needs as the pandemic continues. A growing number of tenants are eager to leave downtown entirely. Either privately or publicly, many owners and occupants have expressed dismay at the grim sight of boarded retail storefronts, vandalism, widespread property damage and safety issues, as well as a perceived lack of leadership at the state and local levels to address the business community’s concerns.
Recent months have demonstrated that the central city’s loss is the suburbs’ gain. Many office tenants have relocated to suburban markets like Lake Oswego, Hillsboro and Beaverton or will do so. Compared to downtown, the suburban markets feature favorable rents, parking arrangements, and safety, along with better proximity for current and future employees. While many suburban tenants are currently able to secure landlord concessions and expansion rights to accommodate anticipated postpandemic growth, the suburban market may become far more landlord-friendly in the months ahead.
Lapse of protections leads to uncertainty while homebuilders remain active
On June 26, the Oregon Legislature passed House Bill 4213, which imposed an eviction ban for both residential and commercial tenancies through Sept. 30, and granted tenants a six-month grace period through March 31, 2021, to repay rent that accrued between April 1, 2020 and Sept. 30, 2020. Then the Legislature passed House Bill 4204, which banned both residential and commercial foreclosures through Sept. 30. While Gov. Brown allowed House Bill 4213’s ban on commercial evictions to lapse on Sept. 30, Executive Order 20-37 extended the ban on foreclosures through Dec. 31, and Executive Order 20-56 extended the ban on residential evictions through Dec. 31.
While it is likely that Gov. Brown will extend the foreclosure and residential eviction bans if COVID-19 cases continue surging, the spring and summer could see a large number of borrowers and tenants subject to foreclosure and eviction. In the residential context, a wave of foreclosures and evictions may lead to further civil unrest, as people demand leniency against the specter of a pandemic and increased homelessness. In commercial real estate, landlords, tenants, and lenders are likely to continue cooperating on short-term rent abatements and deferrals for tenants and temporary restructurings and forbearances for borrowers, particularly if vaccination efforts prove effective and spur optimism for a local and national economic recovery.
For businesses in industries hit particularly hard by restrictions on operations, 2021 may bring renewed efforts to relax restrictions. Despite growing job losses in the food and beverage, hospitality, fitness and related industries, state and local leaders have shown an inclination toward heightened lockdown measures. Many of these measures strike business owners as arbitrary and inconsistent with current scientific knowledge.
In particular, food and beverage operators that have invested heavily in outdoor dining equipment or lobbied to permit the sale of cocktails for customer pickup may increase their efforts to enact measures that strike a more reasonable balance between the economic realities of operating food and beverage businesses on the one hand, and public health concerns on the other. A modified approach to governmental restrictions could have the benefit of both saving jobs and reducing evictions and foreclosures.
Despite the struggles of many businesses navigating ever-changing pandemic restrictions, an ongoing shortage of housing, the desire of many parties to leave the city for suburbs, and a sense that the work-from-home model is here to stay have led to a noticeable uptick in residential construction. In particular, suburban homebuilders have actively pursued development opportunities, and institutional investors have demonstrated an increased interest in manufactured home communities, workforce housing and affordable housing.
Column first appeared in the Oregon Daily Journal of Commerce on December 18, 2020.
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