Office Report: Disappointing Q1 Trumps Hopeful Q4

PORTLAND-The metro-area office market got off to a slow start in 2004 as the overall region-wide vacancy rate rose from 16.1% at the end of 2003 to 16.9% at the end of March, according to the latest report from the local office of Grubb & Ellis. The good news is that activity has picked up, which means an increased number of transactions will begin closing over the next several quarters, according to the report.The overall office vacancy rate for the 17-million-sf CBD at the end of the first quarter was 13.4%, up from 12.7% at the end of 2003. The CBD experienced 119,000 sf of negative net absorption during the quarter. Vacancy in the 24-million-sf suburban office market also rose, from 18.5% to 19.4%, but experienced a relatively healthy 171,000 sf of positive net absorption. Cut by class, the region’s class A space (22 million sf) was 16.9% vacant, while class B space (12.9 million sf) was 17.3% vacant and class C space (6 million sf) was 15.7% vacant. At the end of the fourth quarter, the percentages were 15.9%, 17.4% and 14.4%, respectively. Asking rates also mostly fell during the quarter. The class A average asking rate in the CBD fell from $22.32 per sf per year at the end of 2003 to $22.13 at the end of March. In suburbia, the class A asking rate dropped from $21.42 to $21.26. Asking rates for class B space in the CBD fell only slightly, from $17.73 to $17.70. The suburban class B asking rate average actually rose, from $17.19 to $17.26.Only three of 12 submarkets saw their vacancy drop during the first three months of the year, according to the report. The biggest drop occurred in one of the smaller submarkets, the 1.2-million-sf Clackamas/Sunnyside submarket, which saw its vacancy rate fall to 26.4% from 30.5% at the end of 2003. The submarket saw 50,000 sf of net absorption in the first quarter after seeing 43,500 sf of net absorption for all of 2003. The one-million-sf Tualatin/Wilsonville submarket also saw a significant drop in vacancy, falling from 16.2% to 14.7% on 31,000 sf of net absorption.Excluding the smallest submarket–the 682,747-sf Columbia Corridor, where vacancy rose from 13.5% at the end of 2003 to 16.2% at the end of the first quarter of 2004–the biggest jump in vacancy occurred in the Clark County market. The 3.2-million-sf market had just over 75,000 sf of net absorption, but thanks to 159,000 sf of new additions to the market, vacancy rose to 19% from 16.4% at the end of 2003.Other significant jumps in vacancy include the 1.4-million-sf Eastside submarket, where vacancy rose from 21.4% to 23.9% on 18,000 sf of negative net absorption, and the tech-heavy 3.6-million-sf Sunset Corridor, where vacancy rose from 30.3% to 32.2% on 50,700 sf of negative net absorption. Looking ahead, the Oregon Office of Economic Analysis projects that Oregon will see a slow return to a job generating recovery with employment growing by 1.6% in 2004 and 2.2% in 2005. A recent regional outlook released by economy.com predicts that the Portland metropolitan area, where the unemployment rate now stands at 7.8%, will see employment growth of 1.5% in 2004 and 3% in 2005. The growth is anticipated to come from a variety of sectors including manufacturing, professional and business services, as well as health and education services.”The office market will remain a tenants’ market for the next 12 to 18 months, but the longer tenants wait, the closer to a recovery and the harder the negotiations will be,” concludes the report. “The window of opportunity for tenants to secure significant occupancy cost savings is open, but it may not be at the end of 2004.”