How Real Estate Developers Think. Peter Hendee Brown
we have concentrated largely in the urban center with the exception that I participated in some fairly significant land development and land sales in the 1980s, mostly on the west side, where high-tech was growing.”
An Inkling of High Tech
As late as the 1980s, Oregon was still struggling to move beyond its historical, labor-based lumber economy, and real estate market cycles were short when compared to the rapidly growing Sun Belt. “A good market cycle in the commercial and industrial area would be eighteen months,” says Prendergast, “but you have to have growth to have a decent economy, so the question then was ‘How would Portland make the transition?’ ” The answer began to emerge when high-tech companies began to relocate to the region from California. “Growth started to occur in Portland metro with the advent of high-tech in the early 1980s.”
At the time a new real estate product called “flex space”—a variation on the traditional one-story suburban industrial building—had come on the market and started to supply space for these companies. Flex space started with a basic high-bay warehouse or light industrial building. The innovation was that a strip of office space was tacked onto the front, creating an assembly building with offices. Flex space provides lots of flexibility by allowing office and manufacturing functions to be colocated in a single facility, but because it can house many more employees in its office space than a typical warehouse it requires much more parking. Most warehouses have few employees and just a handful of parking stalls but flex space is half office space, so it requires a much larger parking ratio to serve the same sized building, “on the order of a 4:1 ratio of parking to building area—four parking spaces for every 1,000 square feet of building area—as opposed to 1:1 for a typical warehouse.”
New and growing tech companies in California needed lots of land, including room for expansion, and a good water supply. “But people had made a lot of mistakes in San Jose,” says Prendergast. “As land costs skyrocketed in Silicon Valley, young tech companies tried to keep their costs down by buying smaller amounts of land that did not provide enough capacity for expansion, so when it came time to grow, they had nowhere to go. We had reasonable land costs in Portland, however, lots of water, and good planning, and so up they came.”
Prendergast knew commercial office, which shared some similarities with flex space, so in the early 1980s Prendergast started doing flex space. “The land costs for flex space just took off because it is a suburban application that requires large land areas, so I went further west and bought undeveloped land that had just come into the growth boundary and just gotten utilities and urban services. Then, in 1984, the major users from Northern California started showing up—Epson, Fujitsu, NEC, Kyocera—it was a long list and we had a good run for the rest of the decade.” By 2000, Intel’s largest employment base was in Oregon, where it had between 16,000 and 18,000 employees—more than the headquarters in Santa Clara, California. “High-tech created a tremendous new economy that took the place of the timber-based economy of the early decades of the twentieth century so we capitalized on that and our major land development work on the west side led us to the Hoyt Street railyards.”
A Big Transaction
“We had been partners with the Burlington Northern Railroad for some land they owned on the west side and in 1990 I sold that land to Nike for a significant profit but then I needed to find an exchange property to buy.” Like many people who buy and sell real estate, Prendergast wanted to take advantage of section 1031 of the Internal Revenue Code, which allows sellers of property to avoid capital gains tax by using the proceeds of a sale to buy another property within 180 days. “So our company initiated the major acquisition of the Hoyt Street Yards, which was an obsolete railyard, from a former subsidiary of the Burlington Northern Railroad.” Freight traffic had abandoned the city and moved north to a new intermodal yard, so the only rail service going into downtown Portland by that time was a single freight line and Amtrak passenger service. “The board of the railroad had decided to liquidate all nonrail properties and we had developed a piece of land nearby and that got us interested in the railroad’s property.”
Portland’s Urban Growth Boundary (UGB) was created in the 1970s as a counter to sprawl and as a way to increase the use of transit and obtain the maximum value from other public infrastructure systems. “To a large extent it has served the city well,” says Prendergast. “The city had a strong interest in putting jobs and housing close together and close to transit, and the UGB had the effect of making the urban core the center of activity and a more interesting place as a real estate market.
“So in 1992 we took our master plan for the Hoyt Street Yards to the city council and proposed a public-private partnership.” The forty-plus acres that the railyards represented were made up of two big parcels and “it was a fairly risky deal at the time—there was a significant amount of environmental remediation required and the site needed planning and infrastructure.” When the railyard was first developed in the early 1990s the old street grid terminated at its edges, so there was no power, water, sewer, or streets. The old Lovejoy Viaduct—a big automobile bridge that spanned over the yards—also had to go, “and it was going to be a $10 million problem just to take that down.”
The railyard made up the northern end of a 100-block, 285-acre industrial area that was bounded by the Willamette River on the northeast and was filled with old factories, warehouses, and vacant lots. When the first urban pioneers began to move in, the buildings became home to numerous galleries and artists’ lofts that—legend has it—one gallery owner characterized as the pearls inside the crusty shells of the warehouses. Local business and property owners were searching for a name for the area and, despite a handful of other suggestions, it soon came to be known as the Pearl District.
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