Q3 Report: Area Office Vacancy Freefalls to 14.7%

PORTLAND-A flurry of third quarter lease signings resulted in a record drop in the region’s office vacancy, from 16.2% to 14.7%. The 150-basis-point decline is the largest single-quarter drop since early 1995, according to research by the local office of Grubb & Ellis, which recently released its third quarter report.Nearly every submarket experienced net absorption during the quarter for a combined total of 739,000 sf, a total not seen since before the turn of the century. By comparison, region-wide net absorption was 314,000 sf in the second quarter and 250,000 in the third quarter of 2003. The record-breaking quarter reaffirms belief in the improving health of the region’s office market, but it is by no means fully recovered. Only one in 12 submarkets has a vacancy rate in the single digits while seven have a vacancy rates ranging from 15.9% to 28.8%. The Portland CBD, the region’s largest submarket with about 17.1 million sf of space, saw vacancy fall from 13.5% to 12.8% during the third quarter on 124,800 sf of net absorption. Year-to-date CBD net absorption is still in the red by about 23,000 sf, however, and about two million sf there remains vacant.The second largest submarket is the Washington Square-Kruse Way, which flanks Interstate 5 several miles south of the Portland CBD and totals about 5.4 million sf. Activity there has been strong in recent quarters and the third quarter was no different, as 115,000 sf of net absorption pushed vacancy from 10.6% to 8.5% and becoming the first submarket in the region to return to a single-digit vacancy rate. There, unlike nearly every other submarket, there are no discounted asking rates, no free rent to be had and only basic tenant improvements are included in the price.By contrast, the third largest submarket, the tech-heavy Sunset Corridor, saw average occupancy in its 3.6 million sf rise above 70% for the first time in, well, longer than many would care to remember. Vacancy there fell 200 basis points in the quarter, from 31.9% to 28.8%, thanks to nearly 113,000 sf of net absorption. About 1 million sf remains vacant in the submarket and, like most submarkets, building owners there remain very willing to bargain, with steeply discounted asking rents, high tenant-improvement allowances and at least a few months of free rent.