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12
Retail Market Analysis
COMMERCIAL MARKET
Chris Reeves
Portland State University
Christopher Reeves is a graduate student in the Master of Real
Estate Development (MRED) program and a TigerStop Real Estate
Student Fellow. He has a Bachelor’s degree in Economics and Social
Sciences from the University of Sydney, Australia.Viewpoint’s Market Cycle assessment places Portland’s
retail market in the early stages of a recession, and
broadly captures the current traits of the Portland
market; low new construction, low absorption, negative
employment growth, negative rental rate growth, and
increasing vacancy rates. And Portland is not alone, this
duress is being felt across the country, with more than
half the retail markets assessed by Viewpoint getting
marked with recessionary status. To add some color
for the fourth quarter in the Portland metro market;
the negative employment trends have been dramatic,
from January to October 2020, low-income jobs shed a
staggering 52.8% while medium income declined 9.7%.
Vacancy rates have remained stable due to low supply,
the eviction memorandum, successful repositioning of
assets, and the resiliency of landlords and retailers. 2020
concludes four straight quarters of negative absorption,
while rental rate growth has been dropping and is
estimated to turn negative through 2021. The fourth
quarter also had the lowest deliveries of any quarter this
real estate cycle. It is fair to say that the retail malaise
has impacted all corners of the retail industry, with
the diversity of business models in the retail sector
continuing to present different winners and losers due to
their scalability, online dimension, location, leverage, and
ability to drive new demand.
Within this challenging retail landscape, interesting
and inspiring stories are continuing to emerge from the
retail sector, with the forced redefinition of businesses’
value propositions highlighting the ingenuity of business
leaders, community resilience and happenstance of
the virus. Indeed, customers are performing a basic
calculus when deciding whether to pick up their keys
or their computer; is the item unique or valuable
enough to warrant visiting a store, can it be easily
ordered online, is the experience of visiting the shop
dangerous or easy. With that in mind, it is no surprise
then that 2020 was the rise of the drive-thru, with
Dutch Bro’s Travis Boersma commenting “we’ll open
63 new locations this year. We will finish the year
with more than 430 locations. The customer response
in new markets has been as good or better than even
pre-pandemic”. Starbucks are also emphasizing drive-
thrus, and opting for smaller footprints, with Chief
Operating Office Roz Brewer remarking that Starbucks
are aggressively repositioning to renovative 150 “drive-
thru constrained” locations to become more “high-
volume, car-bound customer traffic”. There will be little
to no interior seating at Starbucks, but it will provide
C h r i s R e e v e s | Retail Market Analysis 2a pick-up window for customers on foot and some
available outdoor seating. This pattern will likely prove
challenging for jurisdictions that have banned drive-thrus
for new construction, placing a premium on locations
that have grandfathered privileges.
Surprisingly, outlet store heavyweight Tanger reported
that their shopper count for 2020 was 99% of 2019
figures, with shoppers being drawn out of their homes
for unique items that are on sale, providing a value
proposition that online shopping portals cannot compete
with. That, and outlet center’s predominantly outdoor
setup makes people feel safer when shopping. The safety
angle, and more specifically the value of personal space
plays out heavily in malls, with regional shopping centers
receiving 40% more unique shoppers than urban areas.
Additionally, the outdoor cafes, and restaurants in these
regional outdoor locations also add weight to the in-
person value proposition. In stark contrast, indoor urban
malls such as the struggling Lloyd center, have lost more
key clientele, and are failing to entice customers indoors
to pick up generic goods. Yet as an August 2020 Mall
Shopper Sentiment Study shows, 55% of U.S consumers
really miss doing their shopping at malls. And investors
turning away from retail might be underestimating
the creative ingenuity of Mall owners when assuming
landlords will leave space vacant. Micro-fulfilment
centers are popping up inside malls, and mall landlords
are targeting online companies that are aware of the
“Halo effect” that a physical presence can provide; a 26%
boost in overall sales.
Challenges persist amongst these pockets of optimism,
with low foot traffic, lost customers, and perception
issues clouding the market. Holiday season in Downtown
Portland had an 80% reduction in foot traffic from
2019. With tourism’s tap of unique customers turned
off, the office daytime crowd largely vanished, and
hospitality predominantly shuttered, downtown
retail has lost its customer base. The only remaining
population is the residents who are exasperated by the
violence, homelessness and civil rest, and are likely not
in the mood for shopping. Lost customers due to a
negative perception issue are hard to recover, meaning
a complicated recovery for downtown Portland. And
perhaps an even tougher challenge facing retail is investor
perception, with Portland free-falling from ranking third
in 2017 to number 66 in 2021 according to ULI’s overall
real estate prospects by market. This is evident when
surveying shifts in the capital markets during 2020,
C h r i s R e e v e s | Retail Market Analysis 3TABLE 1 where institutional capital, private equity, REITS, all
departed retail for greener and safer pastures of industrial
Portland MSA Net Absorption and Vacancy
and multifamily. Chris Nelson of Capstone development
3.0 7%
points to the “disproportionate amount of headline news
Millions
2.5
on our city during a lot of the protests. President Trump
6%
2.0
really sort of poked his eye on Portland and Seattle”. And
1.5
5%
with investment capital more elusive, and apparent
4% risks present, the cost of capital will tighten supply in
1.0
3% the coming years as the market recovers. Lastly, the
0.5
2%
constantly evolving landscape presented by the pandemic
0.0
forces businesses to repeatedly recalibrate their operations
-0.5 1%
due to a shifting of restrictions, whether that is being
-1.0
2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
0%
able to be open for business, the number of people
YTD
allowed in store.
Net Absorption Vacancy
DEMAND
Unsurprisingly, the fourth quarter of 2020 registered
the fourth straight quarter of negative absorption
(negative 160,731 square feet). This brought the total
net absorption figure to negative 795,919 square feet for
2020, which is a stark contrast to the 8 years of vacancy
rate compression and positive absorption from 2010
to 2018 that is illustrated in Table 1. Strong spending
from a steadily growing population, combined with low
deliveries, had created such an excellent cycle for retail
up until the second quarter of 2019 where the market
reached the peak compression point with a meager 3%
vacancy. With mandatory closures and the downtown
population largely vacant, bankruptcies and closures
have ensued, with many staple institutions of Portland’s
hospitality and retail scene shuttering; Powell’s Books,
Salt and Straw, Blue Star, Pok Pok. Also contributing to
this negative absorption statistic is Macy’s vacating the
Lloyd Center in November, following in the footsteps
of Nordstrom, Sears and Marshalls who have all moved
from Portland’s troubled mall. Nicole Onder from
Melvin Mark points to other factors complicating indoor
mall’s success beyond the pandemic; “I mean it’s been over
several years we’ve been seeing the shift from big box to the
desire to shop more locally, especially in Portland. I think
that’s something that’s really important”.
Low supply, the eviction memorandum, and businesses’
efforts to make it to the Christmas sales period has kept
vacancy rates somewhat stable, and perhaps obscures
the full spectrum of the damage. Additionally, from
speaking with landlords, most view their relationship
with tenants with strong loyalty, and collaboration,
and have no desire to boot out struggling tenants, and
C h r i s R e e v e s | Retail Market Analysis 4TABLE 2 would prefer to devise synergistic solutions. In turn,
the nature of the landlord-tenant relationship presented
8%
Vacancy Rate itself as a significant variable determining vacancies
7%
once the pandemic set in. But landlords have pointed
6%
to some tenants making smart calls, who jumped ship
5%
immediately when the pandemic hit, due to a lack of
4% savings or anticipation of the looming recession.
3%
2% Portland Metro vacancies reached 4% in the fourth
1% quarter for the first time since the second quarter of
0%
2016, increased 20 basis points from the third quarter.
2 02 5 Q4
2 02 5 Q3
2 02 5 Q1
2 02 4 Q4
2 02 4 Q3
2 02 4 Q1
2 02 3 Q4
2 02 3 Q3
2 02 3 Q1
2 02 2 Q4
2 02 2 Q3
2 02 2 Q1
2 02 1 Q4
2 02 1 Q3
2 02 0 Q4
2 02 0 Q3
2 02 0 Q1
2 019 Q4
2 019 Q3
2 019 Q1
2 018 Q4
2 018 Q3
2 018 Q1
2 017 Q4
2 017 Q3
2 017 Q1
2 016 Q4
2 016 Q3
2 016 Q1
2 02 1 Q1 QTD
2 02 1 Q1 EST
2 02 5 Q2
2 02 4 Q2
2 02 3 Q2
2 02 2 Q2
2 02 1 Q2
2 02 0 Q2
2 019 Q2
2 018 Q2
2 017 Q2
2 016 Q2
Power centers that were buoyed early in the pandemic
Mall Power Cent er Neighborhood Center Strip Center General Retail Other Retail Portland by increased home improvement trends, have seen
vacancy rates increase markedly. In the fourth quarter of
2019, Power Centers reported below structural vacancy
levels with 1.9% but have undoubtedly been affected by
certain big retailers going bankrupt or contracting their
footprint, closing out the fourth quarter of 2020 with
4.2% vacancies (Table 2). Some of the retailers bowing
out include; Bed Bath & Beyond, Men’s Warehouse,
Pier 1 Imports, GNC to name a few. Restaurateur losses
have been grocery store operators’ gains in 2020, with
Neighborhood Centers maintaining a 6% vacancy rate
since the start of the pandemic. After an initial shock in
the second quarter, strip center vacancy has tightened
slightly in the fourth quarter with a 20 basis point
vacancy reduction. Vacancy in general retail increased 80
basis points during 2020, and other retail also rose 90
basis points (Table 2). Despite recent rises, the overall
retail vacancy rate in the region remains comparatively
low, although this may be understated due to the
eviction moratorium. There is little data available with
respect to the number of tenants that are current with
their leases.
SUPPLY
Year on year net new supply has been declining since
2014, and the pandemic is likely to accentuate this
trend. It took until October to reach 150,000 square
feet of new deliveries for 2020, all of which were smaller
products. New and under construction retail supply is
typified by expansions, some freestanding shops, and
some smaller shopping centers. The fourth quarter had
the lowest deliveries of the real estate cycle, capping off
the weakest year of deliveries this cycle. There remains
336,886 square feet under construction.
Assessing submarket supply, developers are following
demand to suburban and regional areas, with North
C h r i s R e e v e s | Retail Market Analysis 5TABLE 3 Beaverton, Clark County Outlying, Kruse Way, SE
Outlying, and Orchards set to deliver new product in
Market Rent Growth by Product
1 0%
the coming quarters. It is no surprise that investors
and developers are avoiding adding space in the inner
8%
urban markets, a trend that is likely to continue given
6%
the number of vacant properties available and the sharp
4%
decrease in daytime population numbers. Conversely, the
suburban markets are benefiting from the move towards
2%
telecommuting, with higher daytime populations.
0%
-2%
-4%
Significant under construction developments include
201 6 Q2
201 6 Q3
201 6 Q4
201 7 Q2
201 7 Q3
201 7 Q4
201 8 Q2
201 8 Q3
201 8 Q4
201 9 Q2
201 9 Q3
201 9 Q4
2020 Q2
2020 Q3
2020 Q4
2021 Q1 QTD
2021 Q2
2021 Q3
2021 Q4
2022 Q2
2022 Q3
2022 Q4
2023 Q2
2023 Q3
2023 Q4
2024 Q2
2024 Q3
2024 Q4
2025 Q2
2025 Q3
2025 Q4
2021 Q1 EST
2020 Q1
2022 Q1
2023 Q1
2024 Q1
2025 Q1
201 6 Q1
201 7 Q1
201 8 Q1
201 9 Q1
Milltowner 1 in North Beaverton, a 63,400 square foot
shopping center anchored by a CVS pharmacy. This
Mall Power Cent er Neighborhood Center Strip Center General Retail Other Retail Portland
center aims to capitalize on Hillsboro’s ‘Silicon Forest’
with companies such as Intel, IBM and Tektronix
local to the area. Kenneth Findley is the owner of the
property, and it is set to be delivered in the first quarter
of 2021. Another North Beaverton development includes
Kirkland Place, a 27,272 square foot retail center. Lastly,
Mercantile Village will land in the Kruse Way / Lake
Oswego Submarket in June 2021, adding 49,728 of
retail square feet.
RENTAL AND CONSTRUCTION COSTS
Despite the duress being experienced in the retail
sector, rental rates have remained largely stable. This is
attributable to the limited supply keeping absorption
and vacancy metrics in check, and the preference of
landlords to opt for concessions and abatements over
rent reductions. Prior to the pandemic, rent growth had
peaked around the first quarter of 2016, and then again
in the fourth quarter of 2018, before plateauing until
the second quarter of 2019, when rent growth started
to trend downwards. The pandemic again acted as an
accelerator, expediting the decline. Malls dropped rapidly
from the fourth quarter 2018 peak of 3.3% rent growth
to -3.3% in the second quarter of 2020, reflecting
both the declining market position of malls as retail
evolves, and the effects of mandatory closures, and social
distancing. After a reprieve in the third quarter where the
decline in mall rental rates improved to -0.8%, rates slid
again back to -2.7% in the fourth quarter (Table 3).
More broadly, the fourth quarter of 2020 challenged
the fundamentals of all retail products, with sizable
declines in rental rate growth across the market, yet
somewhat remarkably, the rental growth remained
positive. Neighborhood centers dropped 50 basis points
reaching 2.1%, strip centers losing 120 basis points to
C h r i s R e e v e s | Retail Market Analysis 6hit 1.3%, and general retail struggling with a 150 basis
point decline. CoStar estimates that this depression in
rental rate growth will escalate into negative growth
across the market (excluding neighborhood and power
centers) until through 2021. The midterm outlook
for retail remains positive however, with the estimates
expecting positive growth to resume in 2022 and
continue for the foreseeable future, with power centers
and other retail eclipsing $30 per square foot by 2025,
and neighborhood centers reaching $28 per square foot,
with growth of around $10 per square foot this real
estate cycle. Looking at annual rent growth, 2020 has
definitely hit some areas more dramatically. The CBD
and SW close-in markets both registered negative rental
rate growth. In contrast, suburban and regional markets
such as North Beaverton, Gresham, Tualatin, all followed
the narrative of people preferring to shop in less dense
surrounds and the shift of demographic strength to the
suburbs, maintaining rent gains.
Supply chain disruption impacted building costs, with
PVC, steel, copper, lumber, and glass inflating material
and installation costs. According to Mortenson’s cost
index, the following increases occurred from Q3 to Q4;
earthwork 3.5%, site utilities 2.8%, electrical systems
2.4%, preformed metal wall panels 2.4%, metal stair
fabrication 2.3%, roofing system 2.2%, cast-in-place
concrete 2.1%, wood doors 1.8%, plumbing systems
1.2%. Deck formwork, reinforcing steel material and
installation became slightly less expensive during Q4.
SALES / LEASING ACTIVITY
After 2019’s sales boom, 2020’s sales activity looks
understandably subdued. The second and third quarters
registered $80 million in sales, the lowest since 2013.
Cap rates have held firm, with owners looking at the
forest through the trees for retail post 2021. Dominating
the sales landscape has been triple net grocery stores.
Price per square foot has been making incremental gains
since the second quarter, reaching the highest price of the
real estate cycle with $229 per square foot.
Industrial’s favorable risk traits due to the growth runway
of e-commerce continues to steal investment capital away
from retail, with the buyer and seller landscape shifting
dramatically in 2020. Observing the shift in buyer type
from the 2015 to2020 period to a solely 2020 period,
institutional money left the table, representing 1% of
2020 buyers. Private buyers dominated, picking up 88%
C h r i s R e e v e s | Retail Market Analysis 7of sales. Private equity money completely deserted retail
in 2020, as with REITs. These trends were mirrored on
the buyer side with institutional buyers shedding their
retail portfolios. The economic pressure of 2020 has
proved too much for some user-owner retailers, with
an increased percentage of that seller type. Submarkets
with the most activity include Clackamas/Milwaukie,
Yamhill County, Orchards, Mall 205, Sunset Corridor/
Hillsboro. Some of the notable leases happening in the
2nd half of 2020 include a 25,000 square feet Grocery
Outlet in the Orchards submarket, a 21,000 square feet
Smart Foodservice in Wilsonville, a Dollar Tree Sylvan/
Hillsdale.
C h r i s R e e v e s | Retail Market Analysis 8RESOURCES
1. 2021 Annual Viewpoint Market Cycle Retail Chart
2. https://tracktherecovery.org/
3. CoStar Analytics
4. Andy Giegerich, BizJournals https://www.bizjournals.com/portland/
news/2020/10/29/dutch-bros-president-talks-covid-fires-and-smiles.html.
2020
5. Clare Kennedy, CoStar News https://product.costar.com/home/news/
shared/1861207986?utm_source=newsletter&utm_medium=email&utm_
campaign=personalized&utm_content=p1. 2021
6. John Morris, CBRE, The Weekly Take Podcast, “Return to Sender:
Reverse Logistics and the Art of Sending Purchases Back” https://open.
spotify.com/episode/2eUg3JrXdwhnhE0H2fhsHh?si=twUf30i6R3OFcepv-
jvmPOA. 2020
7. Brookfield Properties, “Next in Retail: Reimagining the Future of the
Industry” 2020.
8. Brookfield Properties, “Next in Retail: Reimagining the Future of the
Industry” 2020.
9. Brookfield Properties, “Next in Retail: Reimagining the Future of the
Industry” 2020.
10. Mike Rogoway, Oregon Live, https://www.oregonlive.com/busi-
ness/2021/01/oregon-insight-pedestrians-vanish-from-downtown-portland.
html. 2021
11. Danny Peterson, KOIN.com, https://www.koin.com/news/business/ex-
perts-real-estate-trend-report-shows-portlands-reputational-slump/, 2021
12. Danny Peterson, KOIN.com, https://www.koin.com/news/business/ex-
perts-real-estate-trend-report-shows-portlands-reputational-slump/, 2021
13. CoStar Analytics
14. Kristian Foden-Vencil, OPB.org, https://www.opb.org/arti-
cle/2020/11/18/macys-closes-its-store-at-portlands-lloyd-center-with-a-loss-
of-more-than-80-jobs/. 2020
15. CoStar Analytics
16. Doug Whiteman, Moneywise.com, https://moneywise.com/a/chains-
closing-the-most-stores-in-2020, 2020
17. CoStar Analytics
18. CoStar Analytics
19. Kidder Mathews Q4 2020 Portland
20.CoStar Analytics
21. Mortenson Cost Index, Q4 2020 https://www.mortenson.com/cost-in-
dex/portland
22. CoStar Analytics
23. CoStar Analytics
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