Report: Office Vacancy Sees Largest Quarterly Drop in Four Years

PORTLAND-The Portland office market has officially moved from the recession phase of the real estate market cycle to the recovery phase, according to the latest report from the local office of Grubb & Ellis. Demand is returning, net absorption is occurring, rents are stabilizing and overall vacancy is on the decline, according to the report.Over the past three months, overall office vacancy in this 42-million-sf market has fallen from 16.9% to 16.2% on the strength of 314,344 sf of net absorption. It was the largest single quarter drop since the first quarter of 2000. The recovery began in the Washington Square/Kruse Way submarket — where vacancy fell 200 basis points to 10.6% on the strength of 115,000 sf of net absorption — and is working its way north and west from there. Despite some positive news as of late, the recovery has not yet taken hold in the Portland CBD. Vacancy there held steady at 12.4% during the second quarter but remains up nearly 100 basis points from year-end 2003 thanks to about 150,000 sf of negative net absorption so far this year. Part of the problem is that renewals have generally been for less space than previously leased at lower rates, according to the report.Looking ahead, Grubb & Ellis predicts the recovery will continue at “a moderate pace,” which is in sharp contrast to the explosive and unsustainable growth that most markets experienced during the boom years, according to the report.”We are currently on pace for the office market to return to a state of equilibrium in 3 years,” concludes the report, adding that some submarkets recovering much sooner and others taking longer than three years. “The recovery will move west from the Washington Square/Kruse Way submarket to the Sunset Corridor as options become limited and tenants seek their most economic deal. The CBD will continue to struggle as tenants grapple with many factors adding to their cost of doing business, namely; the cost of parking, an unfavorable tax structure and higher rental rates. Two issues remain wildcards and could have an impact on the pace and direction of this recovery; the war in Iraq, and the upcoming presidential election.”