MARKET HIGHLIGHT, JULY 2008

PORTLAND, OREGON
Phil Oester, Eric Haskins, Craig Sweitzer, Dan Bozich, Andrew Usher and Tyler Sheils

Smart growth in the form of LEED-certified and mixed-use projects is quite evident in Portland. The multifamily and downtown office sectors continue to bloom in the City of Roses.

Multifamily

Portland’s multifamily market continues to get national attention. Part of this success is due to Portland’s location between two West Coast economic powerhouses: Seattle to the north and San Francisco to the south. The other part is due to the great living fundamentals Portland has developed as a city. Portland has established a buzz factor as a place to live that is affordable, fun and green. It has also acted as a magnet for the “creative class” that could help make Portland one of the leading cities in the new economy. The steady influx of new residents and businesses will continue to give Portland the type of economic vitality and diversity that will assure a strong, resilient future, a trend that has not escaped the notice of apartment investors.

The metro area saw 29 large apartment buildings (100+ units) trade hands in 2007 and 8 in the first 5 months of 2008. The majority of these sales have been in Washington County. Nearly all of these sales have been value-added projects built in the mid 1980s and ‘90s and earmarked by the new owners for upgraded interiors and amenity packages. Market vacancy has edged down to 4.6 percent with the lowest submarket vacancy in close-in eastside (3 percent) and in Clark County (3.4 percent).

Between first quarter 2007 and first quarter 2008 the average apartment rent rose 5.9 percent to reach $811. The strongest rent growth has been in the close-in westside submarket at 6.9 percent with an average rent at $1,024. Apartment construction has been light but 1,400 new units will enter the market in 2008, which is more than double the volume of 2007.

With the slowdown in condominium sales and the strong apartment demand, four urban condo properties have been converted to apartments, the latest being 3720 in the new South Waterfront district. The recent joint-venture sale of this new community equates to a per-unit price of $448,916, a new record mark in Portland. The 31-story building built by Gerding Edlen Development Company is set to start renting in August. Rents are not set yet but the two newest urban apartments, the Louisa and the Wyatt, have average rents between $2.15 and $2.86 per square foot. Trammell Crow residential and Simpson Housing also have high-rise apartments in progress in the South Waterfront District.

Large, new garden-style apartments may be a thing of the past in Portland. The Urban Growth Boundary is pushing Portland in and up. The trend even in the suburbs is going toward higher density structures close to transportation corridors and pockets of mixed-use development. The most recent project in the latter planning stages is the 368-unit Alexan Bridgeport by Trammell Crow Residential in the Bridgeport Village area of Tualatin. Likely to be a model for suburban Portland’s future multifamily development, the community will be a mid-rise over two multistory parking garages.

— Phil Oester is a senior investment advisor for Hendricks & Partners in Portland.

Office

The Portland office market is the tale of two markets.

The central city area remains tight with Class A vacancy approaching record lows at less than 5 percent and rental rates that have seen significant increases in the past year. Demand has been relatively stable during the past several years, while there has been no significant new supply delivered to the market since 2000. That is all about to change. Portland central city developers have been busy, but many of the projects under construction are not typical downtown high-rises, which bodes well for downtown as the market will have time to absorb these new mixed-use projects and their bite-sized chunks of space.

Projects currently under construction include the following: the 340,000-square-foot First & Main, a traditional Class A office tower under development by Shorenstein Properties’ that will deliver in 2010; Unico Properties’ mixed-use project The Lovejoy, which will deliver 82,000 square feet in fourth quarter 2008; Machine Works, a mixed-use development by Machine Works LLC that will add 69,000 square feet in February 2009; Gerding/Edlen’s 14th & Everett project that will feature 92,000 square feet of office space in a redeveloped Meier & Frank warehouse when it delivers in 2010; TMT Development’s Park Avenue West that will feature 215,000 square feet of office space and residential units above when completed in 2011; and Gerding/Edlen’s 12th & Washington, which will feature 85,000 square feet of office with residential units above and be home to ZGF Architects when it opens in May 2009.

These downtown projects also illustrate two other development trends at play in the Portland market — many office projects have some mixed-use component to them, whether it be residential or retail, and some form of LEED rating is a requirement for any building seeking Class A status in the central city. Increasingly, tenants are articulating a desire, even a requirement, that their office space reflects their stated corporate philosophy regarding sustainable business practices.

Despite this slew of new construction, tenants in the downtown office market are not likely to see any real softening throughout the rest of 2008 and even the early part of 2009. Rental rates are likely to slow their ascent, but new Class A space in these new projects will fetch the highest rates ever paid in the Portland market, between $32 and $36 per square foot full service.

Portland’s suburban submarkets have not fared as well during the recent economic slowdown as the central city area. While overall downtown vacancy is just under 8 percent, suburban vacancy is 13.5 percent. The Washington Square/Kruse Way office market has seen vacancy rise significantly in the past 4 to 6 quarters, driven by softness in the housing and financial markets. The high concentration of financial service companies in the area has had a fairly substantial impact with space give-backs and a general sluggishness in leasing activity. The construction pipeline has slowed, and just a handful of speculative projects are underway — the most substantial being Shorenstein Properties’ Kruse Oaks III, which will add 110,000 square feet to Kruse Way in 2009. The suburban office market is likely to continue to see elevated vacancy rates and softening rental rates throughout the rest of 2008.

— Eric Haskins is vice president, Office Services, for Grubb & Ellis Company in Portland.

Retail

While there certainly has been a noticeable downturn in national markets and chain retailers, when it comes to Portland’s retail market, the overwhelming sentiment from developers and retailers is, “continue to expand, but proceed with caution.”

Retail vacancy in the overall metropolitan area is expected to hover in the 5 percent range, primarily due to moderate retail development in proven suburban trade areas and new mixed–use development in central city neighborhoods.

The Pearl District and NW 23rd continue to enjoy low vacancy rates and rising rents. The expansion of The Pearl District in all directions has prompted an influx of retailers, especially to the south and east (West End and Old Town), bridging the gap between the central business district and The Pearl. The most significant developments to note include Unico’s Asa Flats + Lofts in the north end of The Pearl, which incorporates a 35,000-square-foot Safeway grocery store and 22,000 square feet of retail, and Gerding & Edlen’s LEED Platinum planned redevelopment of a 110,000-square-foot Meier & Frank warehouse building at NW 14th and Everett. Two additional LEED-certified developments along Naito Parkway are planned for 2009-2010 with both the SEED (Social Economic Environmental Design) redevelopment of Centennial Mills by Lab Holding and the office tower development of One Waterfront Place by Jim Winkler.

Park Avenue West, a 22-story mixed-use development at Park Avenue and Morrison downtown, will add upwards of 30,000 square feet of retail space to Portland’s central business district. On the eastern border of downtown, Shorenstein’s First & Main office tower is under construction with 346,000 square feet of office space and 20,000 square feet of retail space scheduled for occupancy in early 2010. The South Waterfront District continues it’s southern growth even though the condominium market has cooled considerably. To date, OHSU’s Tower, The Meriwether, The John Ross and The Atwater have been completed and 75 percent of the ground-floor retail has been leased.

Portland’s dense residential north and southeast sides have witnessed tremendous change and growth as neighborhood infill has become accepted and convenient for residents. Restorations and conversions of out-dated commercial properties have sparked a resurgence of retail activity led primarily by local restaurants. The recently completed Grand Central Bowl, a historical urban redevelopment, has not only been an attraction and amenity for the inner east side, but also a regional draw due to the uniqueness of the anchor tenant, a 20,000-square-foot, 12-lane bowling alley, restaurant and lounge with independent pizza, yoga, juice and coffee operators.

On the suburban front, the Bridgeport retail trade area continues to grow. Trammell Crow Residential will break ground late this year on The Alexan Bridgeport, a high-density, mixed-use project that will give the suburbs its first taste of urban development.

As the second half of 2008 approaches, there’s no reason to panic. With continued selective construction and careful planning, Portland’s retail market should remain strong throughout the remainder of the year and into 2009.

— At Urban Works Real Estate in Portland, Craig Sweitzer is founder and principal broker, Dan Bozich is senior vice president, and Andrew Usher is an associate broker.

Industrial

Market and economic forces have conspired to create the perfect storm in Portland’s industrial market. For several years, industrial rental rates were not strong enough to justify speculative construction. At the same time, construction costs were increasing significantly due to the red-hot housing market and spiraling fuel and materials costs. This lack of new supply, coupled with several years of solid demand, pushed vacancy rates down to 20-year lows in Portland. Vacancy rates dropped below 6 percent at the beginning of 2007, pushing rental rates up and filling the speculative construction pipeline for the first time in years. As developers committed to construction projects, the economy began to falter with losses in manufacturing and construction jobs as well as severe impacts related to the national and regional housing slowdown.

2007 marked a turning point in Portland’s industrial market. As manufacturing and distribution firms began to experience a slowing in their businesses, developers delivered more than 3 million square feet of new product to the market. The first part of 2008 saw more of the same as an additional 1.1 million square feet were completed. This wave of construction was dominated by big box warehouse and logistics facilities — large by Portland standards — and a significant amount of it was concentrated in the Northeast Columbia Corridor and Rivergate areas, pushing vacancy in those submarkets up significantly. For Multi-Employers Property Trust, Trammel Crow Company has delivered more than 570,000 square feet at Rivergate Corporate Center III, the first building of a planned 2.5 million-square-foot logistics park located on 116 acres. In the Columbia Corridor, Nevada-based DP Partners delivered its first logistics project in Portland, the 265,000-square-foot LogistiCourt @ Portal Way. This followed the delivery of the 300,000-square-foot Cascade Distribution Center by Opus Northwest and more than 350,000 square feet by Birtcher Development at its Townsend Way properties. Increasing competition for tenants in the area has put pressure on rental rates, which are likely to trend down as the year progresses.

The light at the end of the tunnel for the Portland industrial market has been its increasing prominence as a regional distribution hub buoyed by record levels of imports as well as exports at the Port of Portland. Additionally, Portland has seen an increase in interest and activity from the solar and alternative-energy industries driven by the state’s growing green reputation, significant tax incentives and strong workforce with relevant and transferable skills. Recent major metro announcements include: German-based SolarWorld AG has retrofitted a 480,000-square-foot semiconductor plant in Hillsboro, Solaicx Inc. built a 136,000-square-foot manufacturing plant in Rivergate and XsunX has subleased 90,000 square feet in Wood Village for a manufacturing facility.

As 2008 progresses, larger tenants will see more options than they have seen in quite some time and will have the opportunity to upgrade their space at competitive rates, especially in the eastside submarkets. Smaller local and regional tenants that need to be centrally located will have a harder time finding suitable space. Redevelopment will be the watchwords for close-in submarkets as the inventory of older industrial buildings approaches the end of its useful life. Some of these buildings are being repurposed for creative office users and reducing the stock of viable industrial buildings.

— Tyler Sheils is a broker in the Industrial Services division of Grubb & Ellis Company’s Portland office.

TOP DEALS & DEVELOPMENTS Rivergate Corporate Center III INDUSTRIAL: Trammell Crow Company has completed the 573,420-square-foot Building A at Rivergate Corporate Center III. The first building of a planned 2.5 million-square-foot, 116-acre logistics park, it is the largest LEED Silver-certified industrial building in the country, according to leasing company Capacity Commercial Group. The owner is Multi-Employer Property Trust. Kennedy Associates Real Estate Counsel was the pension fund advisor. MULTIFAMILY: San Francisco-based JB Matteson Inc. and ING Clarion Partners acquired the 185-unit Harrison Tower Apartments, a 24-story apartment tower located at 222 SW Harrison St. in Portland. PCCP LLC provided a $33 million senior loan to the joint venture. Williams & Dame Development, Bean Investment Real Estate and Reliance Development sold the fully vacant tower. RETAIL: Reza Investment Group sold 112,755-square-foot Menlo Park Plaza, located at NE 122nd Ave. and Glisan Street in Portland, to a private Southern California-based 1031-exchange buyer for $19.15 million. Tenants at Menlo Park are Staples, Walgreens, ACE Hardware and AutoZone.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.