Portland construction cycle peaking
Portland’s construction cycle reaching a peak as new supply of office, industrial, multifamily and hotels outpaces demand.
May 22, 2019
- Rider Levett Bucknall (RLB) released their Q1 2019 construction cost report, showing Portland’s construction cycle reaching a peak as new supply of office, industrial, multifamily and hotels outpaces demand.
- Office vacancy has risen from a low of 8.9 percent in 2015 to its current 13.0 percent. The cause? A significant increase in new construction and renovation of defunct commercial space into office. Since 2013, almost 4 million square feet of new or renovated office space has delivered to the metro and there is currently another 1.25 million square feet under construction/renovation.
- While the industrial market remains tight at 3.8 percent vacant and fundamentals strong, construction of speculative space remains elevated with preleasing currently light at 22.2 percent. The new construction is also predominantly located on the outer periphery of the metro as the shortage of prime developable land worsens.
- Demand for multifamily housing remains strong with vacancy at only 4.3 percent. New supply is expected to reach a cycle peak of 5,750 units in 2019. However, most of these deliveries were vested pre Inclusionary Housing (IH) and the strict laws have resulted in just 2,269 units permitted, or in the process of permitting, in the 18 months since IH went into effect on February 1, 2017.
- This construction cycle has resulted in 100’s of new hotel rooms delivering in the Portland metro over the past few years. Major construction projects like the 600 room Hyatt Regency Portland at the Oregon Convention Center means that there is still another 2,100 rooms in the pipeline. The surplus of new hotel rooms is likely to soften the market further, keeping rates lower for 2019.
- Another reason for peak construction; according RLB, Portland had the second highest year-over-year overall construction cost increase at 7.13 percent across all asset types. The national average was 5.73 percent in 2018 across all major markets.
- Reasons for the extraordinary rise in construction costs in this cycle are primarily attributed to an acute shortage of skilled labor, rising interest rates and an increase in material costs, such as steel, due to tariffs.
Source: JLL Research