As the Portland-area real estate boom has continued its run, it’s become more difficult for developers and others in the region to find a key piece of the equation for new projects: available and affordable land.
Available opportunities downtown for new office, hotel and multifamily projects are becoming fewer and farther in between, and anyone looking for plentiful industrial land is having a hard time finding anything close-in to work with. One result of this: a rise in the use of long-term ground leases to get projects done.
Long-term ground leases offer a way for developers to build projects on land that they don’t own but instead lease from the owner, often through leases that last 50 years or more. The arrangements aren’t a new trend, but they are a way for players to get into the game even if they don’t own the land.
“Most people would prefer to own (the land),” said Greg Goodman, co-president of Downtown Development Group, a longtime Portland development company that owns scores of properties across the area, including close to 30 prime spots close in and downtown. “As cities grow, there’s less opportunity for that.”
In recent years, Goodman’s company has executed several ground leases for prominent projects in Portland, including to Walter Bowen’s BMP Real Estate Group for both Pearl West and the Broadway Tower. The company also leased land to Alamo Manhattan for a large apartment building project at Southwest First Avenue and Southwest Columbia Street and to Graves Hospitality for a Moxy hotel at Southwest 10th Avenue and Southwest Alder Street.
“Either you look for a partner that shares a long-term vision that includes acquiring the land or you do a land lease,” Goodman said. “The preference is typically to own, but sometimes they’ll do land leases so they don’t have to come up with the money to buy the land.”
PCCP, a real estate finance and investment firm, has worked on a wide range of projects in the metro region in recent years, including some that involved long-term ground leases. At the recent CREW Economic Forecast Breakfast, Jennifer Diaz, senior vice president with PCCP, said the company has developed nearly 2 million square feet of new industrial space on ground-leased land in the past few years. The practice, she said, can be a little riskier, especially in the eyes of investors.
“You’re building something on land you don’t really own and there’s no guarantee that someone’s going to renew that ground lease,” she said. “So you might have built that building for someone else. But you mitigate that by having a long-term lease, by prepaying it. And we are not holding what we build forever.”
Indeed, PCCP has sold some of what it’s built on leased land. One example: the first two phases of PDX Logistics Center, a master-planned industrial development near Portland International Airport that PCCP developed with Portland’s Capstone Partners. Those two phases comprised three buildings totaling nearly 850,000 square feet of space on land leased from the Port of Portland. Information on the sale of Phase I was not immediately available, but Clarion Partners, a New York-based real estate investment manager, paid $36.2 million for Phase II, which Capstone and PCCP developed for $24.5 million.
Diaz said lenders don’t often shy away from such developments because a construction loan usually lasts for three to five years, a much shorter duration than the long-term lease. She also said that some institutional funds have rules whereby they simply won’t get involved in ground lease projects.
But with available property becoming ever more difficult to find in Portland, more investors might just be willing to loosen those rules so they can get in on the market.
“It’s amazing how many more players are willing to take the risk of a ground lease and just get over it,” Diaz said. “If what you are looking for is core industrial in good markets, you’re getting priced out in Southern California and in Seattle, but Portland still looks pretty good. You might just plug your nose and jump in” on a ground lease project.