In August, we reflected on the year-to-date and shared our “optimism” for the remainder of the year while also noting the uncertainty of the election outcome and resulting hesitancy throughout commercial real estate markets. At that time, we noted “something will happen in November” and, well, it certainly has. Now it’s time to size up potential winners and losers as we look forward towards 2025.
One of my favorite observations from the late Bob Brinker was that divided government at the Federal level tends to lead to higher market returns. The logic is simple and the outcome straightforward: less control means slower and more deliberate change which breeds relative stability and predictability for companies to grow. Regardless of your politics, we are entering a period with consolidated political power at both the national and local level. Specifically, Republicans control the Executive and Legislative branches at the Federal level while also enjoying a conservative bent in the Judicial. Democrats command a supermajority in the Oregon legislature, a majority in Washington, and the Governorship of both. Building on Brinker’s observation, that suggests an environment where relatively easy action is possible at both the Federal and State levels which is likely to cause unpredictability.
As a persistent and committed optimist, I am hopeful that two-party control across Federal and State government would lead to the predictability implied by Brinker. Perhaps slowed or eliminated environmental regulation under the second Trump administration will temper aggressive increases in Oregon and Washington? Unfortunately, probably not. It’s unlikely the structural dynamics of two-party leadership within one level of government will lead to the same results across Federal and State levels. Instead, I suspect wildly contrasting policy focus and relatively swift action at both levels will in turn require businesses to adapt quickly. Unfortunately, this suggests that some will pick the actions that lead to success, the winners, while others will not…
What does this mean for commercial real estate markets? Retail has been remarkably resilient overall through the recent pressures of e-commerce, the pandemic, and inflation. That said, within that broader trend the picture is very different in sub-markets, suburban greatly outperforming urban in the Pacific Northwest and Class A and new developments commanding substantial premiums over legacy product. We’ve also seen a flight to value amongst retail operators, exemplified by the trend of high-income Target shoppers heading to Walmart for better prices. Taken together, there will be winners in retail who can adapt to the inevitable labor pressures and tariff-driven price increases. Nonetheless, I expect demand for retail in commercial real estate to remain strong as those winners absorb space left behind by those who cannot adapt.
Industrial can tag along for the ride with retail based on similar logic, albeit with variations in the drivers. The 2020-era tariff policies and pandemic-driven supply chain had an unequal effect on industries. While we can hope that there is not a repeat global pandemic, the tariff-driven pressures alone are likely to force a similar winner/loser result in industrial. That said, with vacancy already on the uptick locally, it seems unlikely that there will be enough successful industrial adapters to absorb all the available space and, as a result, the industrial boom times in commercial real estate are likely to continue to pull back.
Now what about our beleaguered central business districts? Times of uncertainty require competent advice and updated work and I believe we may, finally, be on the precipice of a return of professional service demand and the resulting requirement for office space. Additionally, the winds of pandemic era work-from-home requirements have started to shift, led by tech companies and their workers return to office. As a result, I see the unpredictability of government policy, both national and local, and a more employer-friendly return-to-office environment bringing about improvements in the office market which should lead to increased office occupancy downtown and beyond. Unfortunately, there are significant headwinds to this happening quickly. Not only have rental rates begun to reset significantly lower as a result of new owners benefiting from significant discounts compared to legacy owners, the high tax burden in Portland and persistent crime and homeless issues are affecting morale and willingness to invest.
Generally, we avoid predictions along the lines of those above. However, there is a culmination of clarity from the election results and the tensions that will drive businesses, and their underlying commercial real estate needs, that are particularly clear at this moment. Time and time again, our optimism prevails, and we trust that many businesses will adapt, with the strongest thriving in the process. In commercial real estate, success lies in positioning properties to attract and retain those thriving tenants while maintaining a thoughtful approach to ongoing maintenance and repair. Let us know how we can support your goals.
