The sharpest rent increases were for class A space, up nearly 15% over the previous year. The average cost rose to $24.34 per sf, compared with $21.38 per sf a year earlier. Downtown class A space proved even more precious, with a vacancy rate of just 3.6% and rents stepping over $30 per sf. With net absorption in the CBD over 400,000 sf last year and only 126,000 sf of new product expected in 2001, things aren't likely to change there in the foreseeable future. Notes report author Patricia K. Raicht, client services manager for Grubb & Ellis: "Many tenants with large space needs in 2002 are already scouring the Downtown market . . . attempting to pre-lease space before it is gone."
The sun shone on the Sunset Corridor last year, which recovered from the high vacancy rate that had plagued the area for several years due to overbuilding. Year 2000 saw 450,000 sf of class A space absorbed there, causing the vacancy rate to fall drastically, from 33.4% at the end of 1999 to just 5.9% at year-end 2000. Rental rates also went up slightly to $21.68, from $20.84 a year ago. With vacancy down in the Corridor, new construction has resumed. Opus West just completed a 115,797-sf, three-story, class A office building, one-third of which is already occupied. A 92,000-sf companion building is currently under way.
"Most economic experts agree that the economy has turned the corner," Raicht notes, "and we are entering a period of slower growth. Owners are beginning to hedge their bets with letters of credit to cover large TI packages from tenants with limited or unproven financial history."
In addition, she says that venture capitalists are forcing start-ups to focus on a quick path to profitability and are cutting their losses with firms that are unable to turn a quick profit or meet other funding criteria. "The question is," Raicht continues, "what kind of landing will this economy experience and what will the fallout be in markets such as Portland, where a significant portion of our growth has come as a result of the new economy."
On the construction side, she suggests keeping a watchful eye on activity in Clark County and the Milwaukie/Clackamas submarkets. Raich notes that Clark County commissioners reduced concurrency standards--a requirement that public infrastructure be provided within three years--which essentially put an end to commercial development there. Now that the requirement has been reduced, commercial construction is expected to take off.
She also predicts that much new product will come on line in Milwaukie/Clackamus. Several hundred thousand square feet of class A space is likely to be added at the recently completed Sunnybrook Corporate Center and the 224 Corporate now under construction. "Developers go where the land is," says Raicht. This submarket has large, developable parcels, strong support services and an abundance of housing.
Raicht notes that, nationally, many investors intend to trade in their office portfolios for industrial and multifamily properties, believing that office values will go flat and apartments and industrial offer lower risk. "This has not materialized in Portland, where the office market remains extremely healthy, with low vacancy rates, rising rents and limited new development" she says.
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