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Developers looking to build in Portland are increasingly coming to the same conclusion: In this market, it’s time to go big or go home.

Large projects are in development or under construction all over the Portland-metro area, including a 35-story mixed-use downtown tower from Walt Bowen’s BPM Real Estate Group and Downtown Development Group, Gramor Development‘s The Waterfront Vancouver and the Oregon Museum of Science and Industry master plan. Security Properties of Seattle is on the verge of breaking ground on a 24-story mixed-use tower at the Press Blocks in Goose Hollow, and beginning the design review process for the PepsiCo superblock redevelopment on Sandy Boulevard.

A number of factors are pushing developers in the direction of large projects, according to sources:

• Institutional lenders and investors are behind many of Portland’s largest current projects, and they prefer to dole out capital in large chunks rather than small ones. Big projects need big loans. Some lenders are also willing to accept smaller returns and remain patient while large projects get built.

鈥淭hey’re willing to do lower and lower yields than we’ve seen before,鈥� said Tom DiChiara, founding principal at Cairn Pacific.

Cairn Pacific’s major backer is Prometheus Real Estate Group of San Mateo, California. Prometheus has taken a long-term position on Cairn Pacific’s Slabtown projects in Northwest Portland, DiChiara said. Cairn Pacific is the developer behind the George Morlan Plumbing building and the Leland James, L.L. Hawkins and New Seasons mixed-use projects in the fast-changing industrial area.

• In the 10th year of economic growth, most developers have successfully completed profitable projects in recent years and are flush and confident enough to do something bigger. Developers figure if they made a little money with a smaller project a couple of years ago, they can make more with a larger project now.
• The loss of income due to inclusionary housing rules, which require developers to either devote 15 or 20 percent of units to qualifying tenants below market rate or pay a hefty fee, hurts less in a large project.

鈥淧art of it is that there’s economies of scale, especially when construction costs start going up,鈥� said Sam Rodriguez, senior managing director of Mill Creek Residential Trust, a major multifamily developer in Portland. 鈥淚nclusionary housing, for example 鈥� it becomes at some point somewhat neutral.鈥�

• Many costs are fixed or grow only modestly with larger scale. The same holds true for permit approval: a multifamily project of 350 units and one of 150 units face similar design review processes.
• Land costs are high.

鈥淵ou paid for the land,鈥� Rodriguez said. 鈥淚n theory, the more density you put in, the less you’re paying per unit.鈥�

• Population and job growth are driving demand for ever-increasing density in central Portland.

鈥淒emand is driving most of the need,鈥� said Bob Thompson, founding principal of TVA Architects. 鈥淭he demand for housing, it’s just over the top.鈥�

TVA Architects designed Fremont Place Apartments, a 17-story tower that won approval from the City Council in May after an appeal from the Pearl District Neighborhood Association. The firm is also designing a potential future $1 billion Major League Baseball stadium for the Portland Diamond Project in a partnership with global firm Populous.

鈥淭hat’s an exciting project that is a reflection of the growth we’ve seen,鈥� Thompson said.

A number of headwinds suggest the red-hot pace of development could cool. Construction costs are causing some developers to carefully consider whether to pull the trigger, and subcontractors are so backlogged that projects are facing delays.

鈥淭he labor pool is just completely tapped,鈥� DiChiara said. 鈥淓verybody is behind schedule, the cost is higher and the quality is lower. It’s a tough recipe.鈥�

Furthermore, new projects face increasing competition, particularly in the multifamily and office sectors, as earlier projects deliver. DiChiara said he expects to see some developers hit pause on large projects.

鈥淚 can’t really see how any of them make economic sense,鈥� he said. 鈥淚 think a lot of people, frankly, don’t know their costs, and they’ll be shocked when they come in.鈥�

Then there’s the question of when the broader economy could cool. Interest rates have risen, and a flattening yield curve is showing foreboding signs. A slowdown may be in the offing, DiChiara said.

鈥淚 don’t have concerns about the long term here,鈥� he said, 鈥渂ut I think the next year or two could be a little bumpy.鈥�