It has been widely reported that by 2035, the number of households in Portland will grow ‎by more than 100,000. Various ideas have been floated – both by the ‎city and by private developers – to address the expected housing boom: inclusionary housing, ‎‎“tiny homes,” rent control, to name a few.

Not surprisingly, many of the city’s ideas have been met by opponents arguing that these “affordable housing” options do more harm than good. For example, ‎since passage in 2016 of Senate Bill 1533, which allowed the city of Portland to mandate that ‎development projects with 20 or more dwelling units participate in the inclusionary housing ‎program, new multifamily construction has fallen to almost zero. Without more ‎housing units being delivered, simple supply and demand theory suggests that the affordable ‎housing problem would only be compounded.

The latest solution proposed by the city of Portland is its Residential Infill Project. The idea is to take a fresh look at the rules and regulations that govern the ‎types and sizes of homes allowed in Portland neighborhoods. Like other previous solutions, the Residential Infill ‎Project has been widely criticized by developers and homeowners. If implemented as written currently, the rules would: 1, limit the sizes of houses in the R7, R5, and R2.5 zones by establishing ‎a limit on house size using a floor area ratio (FAR) calculation; 2, revise how height is ‎measured (e.g., measure from the lowest point near the house and not the highest point); 3, increase ‎residential setbacks; and 4, change building designs (e.g., limit how high a front door can be above ‎ground).

But the Residential Infill Project isn’t all bad. It includes at least one proposal that can give ‎even the most skeptical developer or homeowner hope. The proposal would create a new ‎‎“Additional Housing Options” overlay zone in the R7, R5 and R2.5 zones within a quarter-‎mile of centers and corridors near MAX stations, and in “higher opportunity housing areas” that ‎have close proximity to community centers, parks, schools, etc. According to the Residential Infill Project ‎summary, the new “a” overlay zone would allow the following additional housing types:

• a house with two accessory dwelling units (ADUs), one attached and one detached
• a duplex
• a duplex with one detached ADU
• a triplex on lots abutting a corner

These housing types would be allowed as long as ‎they are no larger than a house allowed in the zone. ‎In addition to the freedom to build the housing types above, the city is sweetening the ‎deal by not requiring additional parking and allowing the FAR for all structures to be combined ‎for triplexes on corner lots. The only catch at this point is that one of the units on a lot must ‎incorporate “visibility” features, such as a no-step entry, wider halls and doors, and a bedroom ‎and bathroom to be located on the ground floor of one of the units.

The deal is even sweeter if ‎at least one of the additional units on site is considered “affordable” (i.e., up to 80 percent of median household income) or the ‎owner pays a fee in lieu of providing an affordable unit. If eligible, an owner of a lot could take advantage of: 1, a 0.1 FAR bonus; 2, flexibility in ‎housing types; and 3, the allowance of a triplex and ADU on corner lots.

The proposed rules for the new R2.5 zone also aren’t so bad. ‎The zone would require at least two units when new development is proposed on a lot ‎that is 5,000 square feet or larger, but for land divisions, the new rules would reduce the ‎minimum lot width from 36 feet to 25 feet, allowing more property owners to divide lots. ‎Furthermore, the new zone would allow property lines to be adjusted so that an owner could ‎create a small flag lot less than 3,000 square feet as long as a house is retained on the lot. The ‎new house that could be located on the flag lot would not come without its restrictions, however. ‎The house, no larger than 1,000 feet, would require certain design elements, including a height ‎limitation of 20 feet.

So, as I mentioned earlier, the Residential Infill Project isn’t all bad. Testimony on the proposed draft ‎concluded in May. The Planning and Sustainability Commission will incorporate that testimony ‎into a new recommended draft, which will be sent to City Council in fall 2018 for additional ‎public testimony, hearings and amendments. Eventually, the City Council will vote whether to approve the project plans. Portlanders get to decide whether the proposals described above are something ‎they want to fight or support. Unlike previous “affordable housing” options put forth by the ‎city, the Residential Infill Project may provide at least a couple reasons to support it.‎

K.C. Safley is an associate in the Portland office of Schwabe, Williamson & Wyatt. He focuses on natural resources, real estate and construction. Contact him at 503-796-2955 or ksafley@schwabe.com.

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You’ve heard it before: retail is dying. To a certain extent, it’s true. Amazon has forced numerous stores to pack up and close the shutters. Bookstores were the first victims (but not our beloved Powell’s, thankfully) because their inventories consist entirely of fungible goods. J.C. Penney, Gap, Sears, Kmart and Macy’s are just a few of the retailers that this year have announced major store closures, some in the Portland market. Other retailers will surely follow. But like most macro real estate trends, the death of brick-and-mortar retail stores will be gradual. Comebacks and innovative strategies will be developed and executed to cushion a crash landing.

The purpose of this article is twofold:

1. To explore what the current Portland retail landscape looks like, seen through the lens of a third-year commercial transactional real estate attorney (try saying that three times fast), and
2. To predict what landlords will do to entice service retail tenants into their buildings.

The Portland retail landscape

What happens when retail stores located in large shopping centers (or developments) are forced to close their doors and vacate their spaces? Landlords need to find replacement tenants. In some areas of Portland, this is happening right now. The difficulty in finding a replacement tenant lies foremost in co-tenancy agreements. Most sizable tenants – or those with bargaining power – usually have provisions in their leases that prevent the landlord from renting space to certain types of tenants. Most retailers want other retailers in the shopping center to sell items that are complementary to their own offerings. Customers usually prefer to shop at places where they can purchase more than one item on their list. So retail tenants know it’s easier (and more cost-efficient) to lure customers to their stores if customers are already shopping in the area.

Given this context, the problem is clear: if retail tenants are going out of business because they’re forced to compete with Amazon, and if most existing shopping center leases only allow for other retail-focused tenants who are also going out of business, who is going to fill the empty space? The logical answer is service retail tenants (i.e., hair salons, dentist offices, restaurants, interior design offices, title companies, etc.). These service retail tenants provide services that Amazon does not, and therefore are not as susceptible to the current trends affecting more traditional retail stores.

But what appears to be an easy solution is functionally more difficult to implement. The problem is that most anchor tenants (think Target) don’t want service retail tenants occupying space in shopping centers because they come with intensive parking requirements and don’t sell complementary goods.

To protect their interests, bigger tenants bargain for provisions in their leases that deter landlords from renting space to service-oriented retail tenants. Leases will typically provide that in the event landlords rent space to service retail tenants, either the anchor tenants’ rent will be cut in half or they can terminate the lease after 12, six or sometimes three months. Given the choice between filling a small, vacant space with a service retail tenant or losing an anchor tenant, landlords will likely side with the tenant that helps keep the lights on.

Going forward

If brick-and-mortar retail is to have any hope of survival, it must adapt. Moreover, landlords (and sometimes developers) must rethink how they convince tenants to lease space. One thing landlords can do is to change the way they draft (or have their lawyers draft) operating and easement agreements (OEAs) or reciprocal easement agreements (REAs).

OEAs and REAs are documents that set forth rights and obligations between landlords (or owners) and tenants. Most of these documents contain provisions that restrict landlords from leasing space to more service-oriented retail tenants. But in order to adapt to the current changing landscape, landlords should draft their OEAs and REAs to be more flexible. The goal should be to attract the tenants who are going to be around in the next five to 10 years. This approach has its drawbacks (e.g., where are people going to park?), but the market position that discourages service retail tenants will only accelerate the current trend.

Changing the status quo, however, will require an understanding by the larger retailers that it is in their best interest to loosen restrictions. Generally speaking, a fully leased building is good for everyone. More tenants equals more customers; more customers equals more money. Everyone is happy. But large tenants (this time, think Starbucks) aren’t exactly lining up to give up their bargaining power to ensure a shopping center is fully leased. Although they would like to see 100 percent occupancy, most of the larger tenants are able to negotiate provisions in their leases that provide for an abatement of rent if the shopping center is not fully leased. In some respects, it’s a win-win in either situation.

Like anything, though, bargaining power will shift if the market demands it. Adaptation is a pillar of the real estate industry. Property owners will always strive to find the highest and best uses for their properties. Amazon is having its moment in the sun, but there’s room for service retail tenants too, if everyone can play nice.

K.C. Safley is an associate in the Portland office of Schwabe, Williamson & Wyatt. He focuses on natural resources, real estate and construction. Contact him at 503-796-2955 or ksafley@schwabe.com.

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