Michael Hironimus 0:00
But retail you know, it was sort of muted when you look at nationally prices for, you know, they’re just up 1.9% over pre painted pre pandemic levels. And revenues are up about 2.2%. And so there wasn’t this build out of retail, it’s not oversupplied. And so I I’m sort of bullish on retail, I think that there’s good opportunities in retail with well located assets that have a good tenant mix. I think the tenant mix and the focus on experience are the most important things in retail. People you know, we’re social creatures. I think people despite the variants and everything, people still want to go out, they still want to have a good meal, they still want to be with other people. They still want to try on you know, clothes, they still need to get their hair done nails, you can’t those things you can’t do online. So, you know having a good tenant mix and focus on experience. I think there are opportunities in retail still. And I think that is one of the asset types that I think has room to grow.
Announcer 1:08
Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.
J Darrin Gross 1:28
Welcome to Commercial Real Estate Pro Network’s to CRE PN Radio. Thanks for joining us. My name is J Darrin gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with real estate, investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
Today, my guest is Michael Hironimus with Duckridge Realty Services. He provides private asset and portfolio management, market analysis instruction. He’s an instructor for market analysis. And he’s also a CCI M chapter president. And in just a minute, we’re going to speak with Michael about the current commercial real estate condition of the various asset classes and trying to look beyond the current situation and where things might go.
But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment, we love to hear from our listeners. And also, if you’d like to see how handsome Our guests are, you can check out our YouTube channel. And that is commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Michael, welcome to CRE PN Radio.
Michael Hironimus 3:03
Thanks, Darrin. It’s a pleasure to be here. And thanks for inviting me.
J Darrin Gross 3:07
I’m looking forward to our conversation today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Michael Hironimus 3:17
Sure. Actually, started most of my professional career I started a in insurance actually I was started a insurance company with a friend and we we did it just before Hurricane Katrina hit we did public adjusting and went out and and I was working with a lot of commercial property owners working on there. That was a disaster at that time. And but there was a lot of people that were just sort of, you know, regular folks that had invested in commercial real estate and done really well for themselves. They had large apartment complexes and they were truly concerned about you know, their tenants and getting things back to normal, of course. And that sort of spurred my interest. I didn’t really know much about real estate at that at that time and spurred my interest in getting into commercial real estate.
So when I got back, I moved into commercial started doing some advisory work and that’s when I started investing. Got my first investment property back in 2006. And then I decided, well, you know, the best place to figure out where the deals are at would maybe be to be a broker and understand where the deals were and how they were flowing. And so I started doing that. I worked mostly I did retail and industrial down in the San Francisco Bay area where I was from, and then about four and a half years ago I moved on I’m here to Oregon and got my CCIM designation, which was very important for me. Once I got my CCIM education, I realized all the things that I didn’t know at the time, you know, they always say it’s not what you know, it’s what you don’t know. And CCIM really opened my eyes to a lot of the analyses that go on and being a true advisor instead of just a transactional brokers. So that was, that was great.
So I, when I moved up here, I started my own company duck rich Realty advisors and, and really focused on the advisory side of things then eventually morphed into doing portfolio and asset management, meaning we look after high net worth clients portfolios, actively manage those for them oversee their property managers do financial and market analyses and so forth. How I equate it to his kind of wealth management, if you will, you know, that you always talk with a wealth manager on the equity side, I do it mostly on the, on the commercial real estate side. So that’s what we do. That’s kind of how it’s evolved over time. And I also teach now, for CCIM Institute, globally, I teach market analysis for the institute. And that’s, that’s been great connecting with people around the world, and, you know, just sharpening my skills. So
J Darrin Gross 6:33
Awesome, I appreciate you sharing your background there. And it is interesting, the the I you get into real estate, from an insurance of vantage point. I think I’ve similarly were, you know, curious about real estate myself, as I saw some of my customers stablishing, you know, portfolios or acquiring properties had and have pretty good stuff there. So I can appreciate that. So, you and I, we’ve met a couple times, and you have a, a, I believe it’s a quarterly meeting that kind of got interrupted with a COVID. But you also put out a quarterly newsletter. And the most recent one that I saw kind of caught my attention. That’s, that was kind of the the impetus for inviting me to appear. And I thought maybe what we could do is, is kind of go through to some of the current economic conditions, and how they have affected the various asset classes. And, you know, kind of what your your outlook is as to, you know, how things have changed and what, you know, the future kind of near and far look like, from your vantage point. And I think one of the things that obviously, we’re, we’re recording this here in December of 21, we’re still dealing with a pandemic, it’s created all sorts of interesting situations, you know, supply chain issues, and also just the way people are doing work, you know, more of a remote base than than previously. And so, I wonder if, if there’s a, a starting point that you have, or there are there’s like some additional information that you look at when you when you kind of view the the different asset classes, whether the jobs report, interest rates, government policy, any of that kind of factors into your, your, your viewpoint?
Michael Hironimus 8:55
Well, yeah, it all does. You know, when you’re talking about sort of looking into the future, we try to do what’s called gap analysis, looking at the current supply, and then sort of trying to forecast increased demands, and see if there’s a if there’s a gap there, whether it’s negative or positive. The The thing is, is it all starts with jobs, really, jobs, you know, bringing people people bring in money, and that all filters down to the different asset types. One of the things that sort of thrown a monkey wrench into it and as you’re alluding to, is was the COVID pandemic where, you know, there was this sort of work from home change that that occurred, mostly in office but also in retail, where there was some company means that went to more online sales, restaurants, of course, for one of those as well. But it was just a shift where now you’re suddenly thinking about different types of demand drivers that maybe weren’t there before, just in terms of, well, how do you, we used to take what was called, you know, the, the gap, the demand for office space, let’s take, for example, you know, you usually look at the, when you’re looking at the Labor Statistics reports, you’re looking at, you know, caught kind of the fire sectors, as we call them, that’s finance, insurance, real estate, they also look at government services and professional sectors. And so you look at it, and you say, Okay, well, how much space? Are they taking up sort of square footage per employee? And so let’s say just for an example, you know, per employee on the office sector is 250 square feet per employee built in the past, you are able to sort of extrapolate that out, okay, well, what is sort of the future forecast demand for increases in those sectors and extrapolate that out over square footage, and then you look at your metro area, while how much square footage is in the market? And then you can kind of see that that gap? Well, it’s sort of been sort of turned upside down, especially in office, a little bit of retail, where it’s difficult to forecast those things now, because, well, what percentage of those workers are actually going back into the office? And what sort of threshold is there for these companies to keep that office? So it’s really difficult to do analyses, particularly for office and retail, industrial and multifamily? You know, it’s not as big of a deal. But there is some risk there on that side. And I don’t think it’s all been thoroughly fleshed out at this point, you know, there are companies that don’t even know what they’re doing in terms of work home policy, there was just a report that came out that said that Google, Google is telling employees to come back at the end of January, and now they’ve extended that with this new, you know, variant that’s coming out. So, you know, there’s still a lot of state of flux. If you’re looking across the different asset factors, you know, you get into industrial supply chain issues, and so forth. But, you know, hopefully these things start to get worked out, there’s still quite a bit of risk out there in terms of, you know, understanding where these markets are heading. But there’s some positive things out there as well. So, hopefully, that answers your question.
J Darrin Gross 12:47
Yeah, no, I think there’s just kind of a, you know, state of what is and just said, that uncertainty that kind of underlies it. I’m kind of curious, you know, with some of the asset classes, I have heard of some conversion from use from one to another, ie the hospitality seen some conversion from, you know, hotels to apartments, or even some big box retailer, like malls and stuff. I think they’ve spent some conversion. Have you seen much with respect to office? I mean, is there any movement afoot to convert office into? I don’t know, multifamily or other?
Michael Hironimus 13:38
Not today? Not on, not on a large scale. You know, the differences between multifamily and office are the differences in the internal systems of, you know, with office space, you know, you need, you know, a couple, a couple of restrooms per floor and, you know, multifamily, obviously need restrooms, you know, and every unit that’s up there, so there’s a there’s a difference in the systems, plumbing H fac those sorts of things. And I’m not sure that a lot of developers sort of get those things to pencil all the time. You know, you’re talking about big box retailers. We have seen some conversions, some to retail, some to, you know, fulfillment centers and so forth. I think a lot of that as regionally it just depends on your land values and so forth. Here in the Portland metro. I haven’t seen a lot of that on the ground in terms of those conversions, but there certainly are, you know, different buildings that are taking on different lives for themselves. Talking about you know, looking at the Lloyd center now where that’s headed, probably going from a mall to some type of mixed use along with residential and In summary, Retail and so, you know, a lot of these older facilities are getting a new life which is good. And rethought and, and hopefully with a lot of housing in mind because we are obviously very undersupplied. Here regionally, as well as nationally in terms of, of, you know, housing. So,
J Darrin Gross 15:23
Yeah, no, that definitely is kind of a, a one one, I guess, bright spots for demand. Housing is demand is definitely strong. So, let’s, let’s jump into kind of each one of the the asset classes here if we could, and talk a little bit about where, where things are and where you think, you know, based on the current situation things are going What if we start with say, industrial that that a good place to start or
Michael Hironimus 15:58
Sure. Yeah, start with the bright shining star.
J Darrin Gross 16:02
Yeah, start with and we’ll work our way down.
Michael Hironimus 16:06
Yeah, I started brokering industrial back in 2009. And this was sort of just coming, I guess it was right at the peak of the Great Recession and industrial was not very sexy, I guess. Back then, when I first started, you know, industrial is looked on as sort of a dirty product. You know, if you’re an investor, you certainly didn’t drive people pasture industrial building and pointed out, you know, everybody wanted to be a multifamily. And, and so and obviously, that’s changed over time, you know, as, as the internet progressed, and as the E commerce in nourished industrial is taken on really a new, a new pillar for our economy. So, you know, industrial continues to perform really well, rents continue to rise nationally, as well as locally. here in Portland, we’re running a vacancy rate of about four and a half percent. That’s more or less in line with the National vacancy average. And you’re seeing, you know, rents anywhere from, you know, 8090, over to over $1, triple net here locally, which is a considerable increase, just even pre pandemic. Cap rates, if you’re looking at Cap rates, they continue to either remain stable or decline, I would say where we’re seeing a lot of cap rate compression is on the institutional assets. Institutionally, there’s a lot of money still out in the market, a lot of liquidity, and they’re looking for places to park that industrial seems like a pretty safe bet in those terms. So you’re seeing some Capri compression on institutional assets. is funny. I don’t know if you know, Prologis. But Prologis is pretty much the largest landlord of industrial real estate throughout the United States. And their CEO about three or four weeks ago, came out and said they were essentially sold out a product, they have a one to 2% vacancy rate. And, you know, that can be attributed to just people, shifting spaces, if you will. So that’s pretty significant when you have the largest landlord in the United States come out and say that they’re out of product. And it just tells you about how consumer habits have shifted, you know, when you look at the share of ecommerce that’s risen. You know, there’s just gonna be continued to be and I think as people get more comfortable shopping online, the other thing in the talk about the supply chain issues, you know, there’s been a little bit of shift in thinking in those terms. There used to be and Prologis had actually come out with report on this. There used to be a thinking pre pandemic, where it was just in time delivery, Jaya T delivery, where it was, okay, well, the products are coming out from overseas, they quickly go through the warehouse, and then they’re quickly distributed out to their to their closest facilities or directly to the consumers. That began shifting even before COVID as supply chain issues sort of ramped up, and now they have what’s called just in case delivery. And just in case means that there’s more supplied being stocked onto their shelves just in case they can’t get any shipments from overseas. And that’s just to you know, satiate the consumer demand on ecommerce. And what that does is is okay, so if you’re just keeping more inventory in your warehouses, that means that you need more warehouse They’re anticipating that that could put another 10 to 15% of demand overall, on the industrial sectors, so I think industrial has room to grow. There’s still a lot of demand out there. And, frankly, the supply still hasn’t caught up even at this point.
J Darrin Gross 20:21
I was gonna ask you, you mentioned the four and a half percent vacancy rate. I know I can, you know, holy, even like multifamily stuff that’s almost like, full because the it’s more transitory you don’t really you’re not faking as much as you have somebody move out and you’ve got somebody moving in and, and is that kind of similar in the industrials at?
Michael Hironimus 20:44
Yeah, that I mean, that’s pretty much right on, you know, some of the some of the vacancy, you know, within industrial their sub sectors, you know, you have word of warehouse and distribution, you have manufacturing, you have flex, I would say maybe some of the vacancies coming on the manufacturing side, which has been a little slow to grow after the pandemic, but warehouse, the distribution assets, you know, the vacancy rate is, is remaining low, and like you say, it’s more of companies moving to and from other spaces, and whether they’re expanding or contracting. So yeah, that’s, essentially we’re sold out around here, too, every once a while, you’ll see a spike in vacancy, but that’s usually because there’s kind of delivery onto the market of an industrial asset.
J Darrin Gross 21:28
So thinking the through just a little bit if we we go from a just in time, philosophy for for the supply to now just in case. Do you see more of the I guess the inventory is growing, as well as more of the actual manufacturing or the source of the product being brought on shore to kind of overcome that? Or is that? Are we still is it still cheaper to produce goods overseas and in transport them? Is that Is there a shift there? I mean, I’ve kind of kind of curious about that.
Michael Hironimus 22:11
Yeah, I mean, now you’re talking about economic policy? And, you know, is there more onshoring going on? I would say there is. And that’s being driven by, you know, a few things, there’s a lot of economic unrest with China. You know, whether we agree with all of their policies or not, obviously, supply chain is pushing there, I think there is a push to do more on showing of manufacturing. But you know, if you look at the Labor Statistics, at least locally, you know, we’re not seeing a huge increase in in manufacturing employments, unfortunately, at least regionally. But, you know, that being said, I hope there is manufacturing is a huge driver for us in terms of basic job employment and bringing, bringing dollars into the local economy. Hopefully, manufacturing continues to increase, but, you know, we’ll see, we’ll see how it, we’ll see how it pans out, I guess.
J Darrin Gross 23:23
Sure. And even along the the import, you know, strategy of doing business where we’ve done it seems like if there’s such a bottleneck and in Long Beach, or the or, you know, the primary ports, it would he would give an opportunity or present an opportunity for some of these lesser port ie Portland, to become a solution or a source of importing anything like that, that you’re seeing, or is that is that anything on the horizon that you’re talking about with her?
Michael Hironimus 24:00
No, I don’t. I think a lot of the ports are just packed right now. Some of the smaller ones, you know, maybe are, are soaking up some of that, but it really comes down to where the product needs to go and how it gets there. You know, you talk about intermodal travel and, and it’s it’s difficult right now, because there’s bottlenecks pretty much everywhere. You know, you talk about labor shortages, you talk about increases in supply costs, it can’t say that there’s one thing that is holding everything back seems to be like a little cocktail of different things that are holding back. This bottleneck in supply chain and from reports that I’m reading, it’s probably not going to go away anytime soon. So once again, that’s just going to put more pressure on our industrial assets overall.
J Darrin Gross 24:56
What sounds like the near future is pretty bright for the industrial base. On Demand where you can’t see the end, you know, it’s just yeah, you know, for for, you know, at least the next couple of years because, you know, even if this thing starts to, to figure itself out, and it sounds like there’s kind of a shift from the just in time to just in case that would obviously create more demand for the space. And as people kind of shift their, their buying habits from, you know, in store and they get more comfortable the online certainly makes a good case for for the industrial hand. If, if more than manufacturing comes on shore? I think that would Wouldn’t that naturally absorb some of that industrial? Or is that ready?
Michael Hironimus 25:51
Well, manufacturing sort of a different build a little bit, they rely more on power, maybe less on docks and clear height than warehouse and distribution does. But you’re along the same sense. One thing that we have regionally or at least in the state, is, you know, sort of an artificially constrained supply in the the urban growth boundary. And so that will probably continue to be a force and where new construction is being built, and probably put further supply constraint on in the near future. But I think, you know, the, the risks would be if there’s a big slowdown in the economy and consumer spending, and or if there was a if industrial started to get overbill. But at this point, you know, just looking from the fundamentals, it doesn’t seem like that’s the case anytime soon.
J Darrin Gross 26:51
Got it. Let’s talk a little bit about retail. We kind of touched a little bit about how the buying habits have changed. But what is the current state of national and local for retail?
Michael Hironimus 27:10
Yeah, I think you sort of have to disaggregate the retail. You know, malls have been beat up. Those are places where there was large amounts of debt, and not a lot of consumers were in the large malls. You see mall failure and defaults nationally. But I think some of the other types of retail, particularly grocery anchored retail, ended up doing pretty well and remaining stable through the pandemic, locally, you know, rents pretty much remained stable, they declined just slightly, but they’re pretty much back up to where they are pre pandemic level and run at about $20 per square foot annually. But if you look at it, you know, talking about industrial office multifamily, you know, there was large increases in pricing and revenues. But retail, you know, it was sort of muted when you look at nationally prices for, you know, they’re just 1.9% over pre painted pre pandemic levels. And revenues are up about 2.2%. And so there wasn’t this build out of retail, it’s not over supplied. And so I I’m sort of bullish on retail, I think that there’s good opportunities and retail with well located assets that have a good tenant mix, I think the tenant mix and the focus on experience are the most important things and retail. People you know, we’re social creatures, I think people despite the variance and everything, people still want to go out, they still want to have a good meal, they still want to be with other people. They still want to try on, you know, clothes, they still need to get their hair done nails, she can’t those things you can’t do online. So, you know, having a good tenant mix and focus on experience. I think there are opportunities in retail still. And I think that is one of the asset types that I think has room to grow as long as consumer spending remains at the levels of the round.
J Darrin Gross 29:25
So when you said you’re bullish on retail, and I’m just kind of thinking of an even pre pandemic, there was kind of the, the death of the malls was kind of a foot as far as the you know, they were having to change their their way trying to create more of an experience kind of thing. Yeah. When you’re assessing this, you mentioned good tenant mix and good location. Is there anything that outside of that I mean, because I you I’m just thinking like, having grown up in the Midwest and in seeing the mall where I bought every pair of Levi’s be destroyed and redeveloped to a Lowe’s now, I’m like, Are you kidding me? Yeah. But, but just the, you know, I think like you said, if, if, if a retail center has, you know, grocery being a good anchor, and about build, I mean, those seem to be doing very well. Is there any? Is there anything outside of that is that pretty much that’s, that’s as simple as it gets? You got to have that good tenant mix? And a good location?
Michael Hironimus 30:39
Yeah, I mean, you also want to be in areas that have good demographics, good, what we call psychographics, which are spending habits, you want to understand where the demand and what those consumers are looking at? What sort of discretionary spending, and you want to make sure that those line up well with with your tenants, we do those sorts of analyses where we look at okay, well, if a tenant is looking at coming into their once again, what is that? What is that gap? Is there demand for that type of tenant, and are they going to be a good mix in terms of the other tenants that are in the property. But, you know, going back to fundamentals, you know, place with good, good visibility, places that, you know, places that have, or retailers that have abilities to fulfill online orders, I think are going to be more in the future, we’re seeing a lot of people that are a lot of properties that are moving towards more of, you know, drive thru, retail, which I think is going to get even more popular, where you can go through and, and, you know, not just get a coffee or, or fast food that you can drive through and pick up groceries or drive through and pick up your jeans or things like that. I think that you’re going to see more of that in the future. And that’s going to change how layouts are for retail. In the future. I think we’ll see. We’ll see different types of layouts and new development in the future for retail. But I once again, I think retail has has a bright future ahead. And I think that I think the death of retail has been a little overstated. Not necessarily malls, malls, have been having a tough time generating traffic, but good retail, neighborhood shopping centers, power centers, they should they should do well, I think in the coming years.
J Darrin Gross 32:50
chatted. We talked a little bit about Office, is there anything more that, you know, with with offices? Is it is it pretty much based on? You know, how people are working? Are they coming back? Is it just more of an uncertainty or? Or is there any, any anything we didn’t talk about? Yeah.
Michael Hironimus 33:15
Well, I mean, office is the I think the probably holds the most amount of risk right now, just in terms of, you know, what companies are thinking about in terms of balancing this work from home? What are their employees want? I think that, you know, you read reports, and one report will sail out, everybody wants to come back and want to report a sizzle, everybody wants to stay home, I think it’s going to be somewhere in the middle, where there’s work from home flexibility where people can go into the office if they have an important meeting or want to collaborate with their team members. But maybe they also want to stay home and work in their slippers or stay at home with their dog or their kid who’s in school. It’s it’s going to be more flexible. And once again that that creates a little bit of difficulty when we’re trying to understand forecast demands in office. Castle, which puts out a barometer Castle barometer, the castle is the company that does the key cards that you know for getting into your office and getting into buildings and so forth. And so they track you know, people that go through and right now we’re only at about 40% occupancy nationally in terms of people going back into the office. So we’re still well below pre pandemic levels. You know, vacancy in the Portland metro areas running about 16% on direct vacancy. It’s stabilizing. Luckily, we had a ton of sublease space that came on late 2020 early 2021 Luckily, that’s starting to stabilize and our vacancy stabilizing. But you know, really the vacancy rate, I think is much higher than that when you factor in some shadow vacancy that’s in the market. You look at some large buildings downtown, the Bancorp buildings running. You know, they have about 350,000 square feet vacant, wells, Fargo’s got 150, the coin towers got 125 16 mains got 150. So you look at these buildings that are downtown that have a lot of vacancies still. And it’s going to be difficult to absorb all of that, at least in the near term. I think it’s going to take a couple of years to get back to some sort of stabilized vacancy rate that we’ve seen in the past. And once again, I think that script is still being written as companies wrestle with the work from home policies.
J Darrin Gross 35:53
No, no, it’s, it’s interesting. I know, you know, early, you mentioned kind of the average square footage per person. He said around 250 square feet. I’m kind of curious, you know, he is we just kind of talked about the space use for retail being kind of reconfigured, if you think that the the space for office will be reconfigured, plus or minus, maybe because like, you know, if we, if we’re in this continuous cycle of the new version of, of whatever the pandemic presents itself as, and we’re trying to create space. Could it be that that people get more comfortable coming back, but just to be safe? We increase the space or? Yeah, that? I mean, it’s kind of thought of that till just we’re sitting there talking. But that mean, seems like at least, I don’t know, if it would mean that you would, you know, or possibly that you have a reduced workforce on site. But you have more space per person, which basically nets out the similar square footage demands? I don’t know. Does that make any sense? Or is it Yeah, well,
Michael Hironimus 37:07
So if we think back to, let’s say, the early 2010s, you know, around 2010, there was a real shift in office to go from sort of the old cubicle style that we thought about traditional office to more of open collaborative spaces. When you think about tech, you know, there was these bench style, office seating and more of an open air area, there was much less demand for private offices and cubicle space. I think we’re gonna actually maybe go back and revert a little bit. And the other thing is, is just how office landlords look at, you know, this, this safety measures for tenants, you know, these touch spaces, keyless entries, we’re looking at increases in H back for better air circulation to get out some of these, you know, vapor particles and so forth. And I think the idea is to try to make it so that people feel safe going back into the office, and I don’t think it’s going to be these big open air, necessarily spaces, maybe it does go back to more private offices where people are sort of sheltered a little bit. But it’s going to be interesting to see how that, you know, like you said, the price per square foot for employees, they were starting to pack them into offices, and there was concerns at one point there was going to be as stress on the on the office systems, I think it’s going to go in the opposite direction, our office square employee per square foot is going to start increasing as people want to sort of have a little more shoulder room and and as people are actually in the office, I think there’s going to be less people in the office at any given point. And there was in the past.
J Darrin Gross 38:59
Yeah. No, definitely be interesting to see where it lands. Let’s talk a little bit about multifamily. Sure. It’s been kind of the the, one of the demand our most in demand products. We touched a little bit about the demand for housing. How do you see the the multifamily housing and you know, are we do we have any lingering effects from the moratorium on evictions, etc. Or are we are we pass on that?
Michael Hironimus 39:39
I think in some pockets, perhaps there’s some lingering effects to that I, you know, surprisingly, overall, with some of the stimulus that went through, there really wasn’t a large decrease in rank collections and that that’s nationally as well as locally. We really didn’t see a lot in terms of defaults which were expected and so forth. In fact, the opposite has been true as as you know, labor shortages and cost of materials, increased multifamily construction sort of declined. As you know, there was continued demand on multifamily construction increase year over year about decrease 45%, I believe, locally for multifamily. And that’s a little bit concerning part of it once again, is the labor shortages, part of it is increasing in material costs. Part of it is some of the governmental regulations talked about rent control and inclusionary zoning locally. You know, there’s been a decline which isn’t good, that’s only going to put more pressure on on rents and prices per unit increasing. costar in September reported that Portland had the fifth fastest declining vacancy rate among the top 50 metros in the country. So that’s pretty significant. Portland had a lot of demands, despite, you know, sort of limited supply. And it makes sense to a certain extent, because if you think back, you know, a couple years takes a couple years to break ground, you know, you’ve got to go through planning and zoning and so forth. And, and if you think back a couple of years, well, that’s when the almost the start of the pandemic started. And so I think there was some sort of a hiccup there, I think it’s gonna increase again, multifamily will come back. Hopefully, we get the labor shortages figured out, people start going back into the workforce. But I think multifamily is solid, I mean, really solid. You’re just seeing huge price increases, rental increases are going up, nationally, as well as locally, and I think it’s a great asset class for the future. If the Fed increases interest rates significantly, which there’s just starting to telegraph a little bit, that might be that might put future homeownership out of reach for some folks, which will just further exacerbate the problem for in demand for multifamily. So I think multifamily is still got room to grow, still got room to expand, we really need more construction and more. We’re we’re severely under supplied both in Portland and in the state overall. And hopefully, these state governments and local governments start to figure that out and incentivize developers to increase because that’s the only way we’re gonna get affordable housing and suppress these memories.
J Darrin Gross 42:50
Yeah, now, that’s always been kind of a head scratcher, you know, some of the local politics and how simple economic, you know, balance is supply and demand. And, and seems to me, that’s a pretty, pretty simple one to see. But it seems pretty difficult to enact I mean, if you if you want to overcome this shortage, you know, if you flood the market with product, you would say, you know, accomplish that, but that’s, that’s not the direction they’ve, they’ve chosen to head so,
Michael Hironimus 43:25
Yeah, well, you know, you have the rental, you know, the first in the country, statewide, you know, rent control, and then Portland sort of double down on the inclusionary zoning policies. So anything over 2020 units, you have to have 20% for low income housing. And what that really did was, you know, include that with once again, labor shortages, custom material increases, it just didn’t get a lot of developments of pencil anymore, you take the land costs that are increasing in Portland metro area. And so there’s no surprise that there was a severe decline and construction in downtown Portland. And so their policies essentially did the opposite of what they were trying to do, instead of getting all these affordable housing units on the market. It essentially shut down construction for most people because it just didn’t pencil. And so, you know, unfortunately, politicians are passing laws that do the opposite effect of what they’re trying to accomplish. You know, that’s a whole nother podcast.
J Darrin Gross 44:39
Yeah. It’s just a constant you know, frustration and and yeah, it’s a topic that everybody has an opinion about and, and like said we could do multiple episodes on that. Sure. Sure. For now, we’ll stop there. But, Michael, if we could, I’d like to shift gears here for Second, by day, I’m an insurance broker and, and try and work with my clients to assess risk and determine what to do with the risk. And there’s there’s three strategies we typically look at, we try and figure out if we can, first if we can avoid the risk. If that’s not an option, we’ll see if there’s a way to minimize the risk. And when neither of those are an option, then we look to see if we can transfer the risk. And that’s what an insurance policy is, is a risk transfer vehicle. And so I like to ask my guests if they can look at their own situation could be their their clients, investors, tenants, the market, interest rates, etc. But take a look at the situation and try and identify what you consider to be the biggest risk. And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Michael Hieronymus, what is the BIGGEST RISK?
Michael Hironimus 46:06
Oh, goodness, the biggest risk. If you’re just talking about the commercial real estate industry, overall, I would say the biggest risks that I can think of at this point would be dry up and liquid and access to debt. And a significant shift in interest rates. A lot of the acquisitions that have been occurring have been at, you know, compressed cap rates, and so forth. If we have a large push on interest rates, there’s one of two things that can happen either your risk premium, the cap rates are built upon us is going to compress even further, which is probably going to mean to drive people out of the the asset type, or you’re going to have increases in capitalization rates, which is going to have severe effects on valuations for all the asset types, really. So I would say that’s the biggest risk at this point. The other risk to that I think, at least off from an investor perspective, and, you know, we try to we try to balance this out and be conservative is that and I’ve seen this in the past, we saw this in the great financial crisis where sort of whatever has happened in the past people project into the future. And so we have these, you know, great rental increases, you know, you’re looking at industrial multifamily, even, you know, some increases in retail and office and you go and you try to extrapolate that out into the future, I would say that there’s a risk there in that. If you’re anticipating those rental increases to continue on. At infinite, that you probably know it underwriting very well. And you may be setting yourself up for risk and potential issues in the future, I would be looking at forecasted demand, looking at jobs, how they’re shifting within your metro area, how looking at the changes within the different industries that are focused on your asset type, and be conservative in your underwriting because I think once again, there’s there’s going to be maybe a slowdown in the future things can’t run 100% Hot for forever. So once again, if if these supply chain issues continue, and if interest rates expand, it may signal cooldown in the economy and those rental increases may not continue in the future. So I would say one of the biggest risks is just you know, be conservative in your underwriting when you’re doing your acquisitions, and make sure that those those are all increases, make sense and buy on actuals. Today, don’t don’t buy on anticipated returns in the future.
J Darrin Gross 49:26
Always good advice, but in the heat of the moment when there’s demand. Hard to hold to that. No,
Michael Hironimus 49:33
I know, I know. You just got to stick to your principles because I think people that stick to their principles and investments. They can hopefully weather the downturns better.
J Darrin Gross 49:44
Well, I agree. Michael, where can listeners go if they’d like to learn more or connect with you?
Michael Hironimus 49:53
Oh, yeah, great. Um, you can always reach out to me I’m on LinkedIn or you can Go to duckridgereality.com I also, as you mentioned in the beginning, I also run a societies called the Oregon Society of Commercial Investors. That’s where I put my quarterly reports and pre COVID, we would get together quarterly. But that said, ORSCI.net. You can check that out. We’ve always got articles and, and quarterly reports. But then, yeah, love to connect anyone out there.
J Darrin Gross 50:34
Cool. And all of that will be listed in the shownotes here. And so if you’d like to connect with Michael, I encourage you to do so. Great information and insight. As always, Michael, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it, and learned a lot and I look forward to doing again soon.
Michael Hironimus 50:56
It was my pleasure. Thanks for having me.
J Darrin Gross 50:59
All right. For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to commercial real estate pro networks. CRE PN Radio.
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