To complement our residential real estate piece from last month, we sat down with a Bend, Oregon commercial real estate expert, Jay Lyons, Principal Broker with Compass Commercial Real Estate Services. He answered a few of our detailed questions about the commercial real estate market and how many COVID-related trends are affecting the space. We appreciate his insightful answers! Read on to learn more about exactly what’s happening in Bend, Oregon commercial real estate.
What is the greatest impact to commercial real estate since the start of the pandemic in early 2020?
COVID’s greatest impact on the commercial real estate market is the ongoing uncertainty it has created for tenants. This affects every aspect of commercial real estate because tenant uncertainty inevitably impacts landlords and lenders as well. The best example of this is tenants who were asking landlords for rent deferral or abatement when COVID first started. Many landlords then turned to their lender and requested mortgage relief. Within weeks, every layer of the commercial real estate industry had been disrupted.
Has Bend, Oregon commercial real estate recovered from this impact?
Bend has fared better than most cities, but I would not say we have fully recovered. COVID is unique in that the level of disruption varies significantly depending on the tenant or property type. For example, the industrial market as a whole has not experienced many negative impacts from COVID. The market has continued to get stronger with historically low vacancy and rapidly increasing lease rates. The retail market has recovered for the most part, but there are certain types of tenants, restaurants and gyms for example, that continue to struggle with the ever changing state guidelines. Of the three property types we track, the office market has been the most impacted. While we haven’t seen a spike in vacancy or subleasing activity, new leasing activity is sporadic as companies continue to determine what their office space needs look like going forward.
In your opinion, what are the impacts of Work From Home (WFH) on the commercial real estate market? Have you seen a shift with existing businesses in Bend moving to a more flexible or permanent WFH policy?
We have seen a significant shift in businesses moving to a more flexible WFH policy, but I believe the impact on the commercial real estate market, at least in Bend, has been relatively modest. Here’s what I mean by that. Industrial and retail tenants need to be at their place of work to operate their businesses so when we’re talking about WFH’s impact on the commercial real estate market, we’re really talking about the office market. Since COVID started, we’ve seen the office vacancy rate increase from 4.11% at the end of Q1 2020 to 7.12% in Q3 2021 with a very modest level of subleasing activity. These indicators tell me the local office tenants are, for the most part, retaining their office spaces.
WFH has had a far greater impact on larger metropolitan areas where tenants have vacated large blocks of space causing office vacancy rates to climb substantially over the last 18 months. The ability to work remotely, either permanently or indefinitely, has led many to pick up and move to towns like Bend, Oregon in search of a higher quality of life. The inbound migration we’ve experienced has had a positive impact on Bend’s real estate market and led to Bend being referred to as a “Zoom Town.” That inbound migration initially benefits the residential market but eventually benefits the commercial market as well.
What is happening in the commercial/industrial/hospitality markets due to the employee shortage/labor challenges?
The employee/labor shortage is a nationwide issue and one that’s having a significant impact on businesses across Central Oregon. Companies can’t operate efficiently or provide the same level of service if they’re understaffed. Furthermore, existing employees are taking on more work and feeling spread thin or burnt out. There’s no easy solution, but it’s an issue that needs to be addressed.
Are you seeing any new trends in commercial real estate?
On the “for sale” side of our industry, cap rates for investment sales continue to be pushed downward as demand outpaces supply, especially in desirable markets like Bend. For leasing, the uncertainty created by COVID has carried over into lease negotiations. More so than ever, tenants are seeking maximum flexibility by trying to negotiate various tenant-friendly deal points like COVID clauses, shorter lease terms and rights to terminate early. Landlords typically push back hard on these deal points, but the increased frequency of these deal points appearing in lease proposals is noteworthy.
Is the commercial real estate market and pricing in sync with the residential market? Does one usually follow the other?
The commercial real estate sales market is very strong, but not as hot as the residential market. Everyone has heard the stories on the residential side of multiple offers above asking, no inspection or appraisal contingencies, etc. That’s not reality on the commercial side. Asking prices are increasing and we can receive multiple offers on certain properties, but very rarely are offers above the asking price and every offer has some sort of inspection contingency attached to it. The commercial market typically trails the residential market by 6-9 months and that has held true in this cycle.
Are new leases in Bend, Oregon commercial real estate primarily with existing Central Oregon businesses or new businesses coming in from out of the area? What type of businesses are you seeing moving into Bend over the last two years?
Leasing activity is well balanced between existing businesses and companies relocating to Central Oregon. There are also a fair amount of leases that come from existing residents who decide to start a new business. The types of businesses cover the entire spectrum including light manufacturing, research and development, pharmaceutical, technology/software, medical, financial services, retail, health & fitness and more. For companies relocating from elsewhere, Bend, and the quality of life our community provides, is the most commonly stated reason for relocating.
Have you seen any commercial spaces vacated (businesses leaving?) or leases terminated due to the employee shortage? The childcare crisis? The housing crisis?
I have seen a few businesses vacate their space due to the employee shortage with the most notable being Sparrow Bakery. Others have reduced their hours and/or days of operation. I have not heard of any business shutting down due to childcare or housing, but both are significant concerns for local companies from a hiring perspective. I have spoken to numerous clients who are struggling to fill positions because of the lack of childcare and/or affordable housing.
Any other key bits of information or facts you wish to share?
Central Oregon will always be susceptible to ups and downs in the economy, but I don’t see the desirability of our region or the inbound migration slowing down anytime soon. While growth is generally viewed as a positive, it also presents significant challenges with affordability, childcare, and labor just to name a few. Assuming we can address these challenges while continuing to maintain the strong sense of community we currently have, I believe Central Oregon has a very bright future.