Office Tenants Demand Walkable Sites and Transit Access

PORTLAND, OR—Portland’s unemployment rate stood at 3.9% at the halfway point of 2018, unchanged from one year ago. The labor force in Portland has continued to expand and the number of nonfarm jobs has jumped 2.2% year-over-year to 1.197 million positions. With unemployment expected to hold at or near a record low through at least the remainder of the year, companies will continue to go to great lengths to obtain or retain skilled employees, and owners will follow suit with a wide array of improvements as a result.

A recent example is MODA Tower, a 398,412-square-foot office tower in downtown. American Realty Advisors along with JV partner Unico Properties LLC recently acquired the tower for an undisclosed purchase price. The new owners have indicated improvements are afoot for the asset.

The class-A property is centrally located at 601 SW 2nd Ave. in the central business district, featuring panoramic views, high-quality finishes, an on-site Nordstrom Rack and five levels of parking.  The tower’s design creates six corner offices per floor.

“Portland’s CBD has quickly emerged as one of the nation’s fastest-growing tech and innovation hubs,” says Albert Pura, senior director at ARA. “Firms are continuing to migrate to the region in search of strong value alternatives as compared to San Francisco, Los Angeles and Seattle. MODA Tower will benefit from this ongoing economic growth and migration of jobs, driving long-term demand for the property and placing upward pressure on rents.”

MODA Tower is one of the few assets in the region that was delivered after 1999.

“Most of the office buildings throughout the region are of older vintage and require significant capital investment in order to remain competitive,” explains Pura. “This was a rare opportunity to acquire a newer asset with strong in-place cash flow, one of the most prestigious business addresses in the city, and very limited opportunities for new development of an office property of this scale due to a lack of available sites.”

MODA Tower has strong historical occupancy with original tenants MODA Health and Lane Powell occupying the property since its initial development.

“We strategically target properties that have proven track records and strong in-place occupancy,” says Pura. “At 90% occupancy, the asset has immediate stabilized cash flow with opportunities to increase NOI through leasing remaining vacant space, as well as taking advantage of ancillary revenue opportunities within the five levels of parking. Our core approach is to acquire properties that will deliver long-term value to our investors and be sustainable in times of economic volatility. The contractual long-term leases, variety of revenue streams and overall market fundamentals position this asset to continue to perform well over time.”

The new owners also have a finger on the pulse of what tenants are seeking these days.

“Office tenants and employees are seeking extremely walkable locations with direct access to transit and amenities. MODA Tower is precisely aligned with these demands, quickly connecting tenants to a diverse variety of restaurants, hotels and entertainment venues. There is an additional opportunity to add value to the asset through strategic renovations and upgrades, including a renovation of the building lobby,” says Brian Pearce, Unico Properties senior vice president, real estate services.  “We look forward to bringing an exceptional amenity package and a first-class tenant experience to the building, and elevate MODA Tower to a top-tier building in the market.”

According to Pearce, the property provides direct access to the MAX light rail transit system and features an amenity package including an on-site daycare facility, gourmet coffee and food service, bike storage, exterior terraces and unobstructed views of Mt. Hood and Willamette River.

“We were looking for a lower-risk asset that would perform well through any potential softening in the market. MODA Tower is a well-leased building that will provide stable, risk-adjusted returns,” Pearce tells GlobeSt.com. “Everybody’s doing lobbies, fitness centers and other amenities like that. We’ll be no exception. The good news here is it’s a light refresh versus the heavy lifting you’re seeing a lot of older buildings in Portland have to do. This is one of the benefits of the building being less than 20 years old.  It doesn’t need a super-expensive repositioning.”

Jason Flynn at Eastdil Secured represented the seller.

It was a tale of two markets in the second quarter with the overall vacancy rate increasing in the CBD by 30 basis points, and conversely decreasing in the suburbs by 50 bps resulting in an unchanged citywide overall vacancy rate from the first quarter, according to a report by Cushman & Wakefield. The slight increase within the CBD can be explained by three new buildings all in excess of 150,000 square feet coming on line within the quarter. Two-thirds of the leasing activity took place in the suburbs, which is a shift from the first quarter when leasing activity was a near 50:50 split between the two markets.

Continuing on trend, Portland’s office market hit record high rental rates for the sixth consecutive quarter. The citywide second quarter figure closed out at $28.34 per square foot on an annual full service basis, a 6.8% increase from the end of the second quarter 2017.

Significant occupancy growth triggered the CBD net absorption figure to climb from -480,115 square feet in the first quarter to a positive 248,091 square feet in the second quarter. WeWork, which claimed the largest lease at 70,190 square feet of the first quarter, took occupancy in the newly remodeled Power + Light building. With new and recently renovated space coming on line at strong pre-lease figures, absorption should continue an upward trajectory, says Cushman & Wakefield.

More than 550,000 square feet of the total 1.4 million square feet expected to deliver during 2018 was delivered in the second quarter. Four of the five properties are located within the CBD with the exception being The Division coming on line in close-in Eastside. Both Field Offices (at a combined square footage of 330,208 square feet) and a fully leased Heartline building (70,702 square feet) delivered in the CBD submarket of close-in Northwest. Also delivering was the newly renovated Meier & Frank Building at 158,000 square feet.

Meanwhile, there are stark differences to the two largest deliveries in the second half of this year: 9North delivering in the third quarter has yet to ink a lease, while Broadway Tower, delivering in the fourth quarter is 77% preleased, thanks in large part to Amazon.

Office inventory continues to rise significantly this year with half a million square feet delivered in the second quarter alone, to be followed by another half a million square feet for the balance of 2018. As this new product comes on the market, competition for major tenants will heat up, swinging the pendulum back into the tenants’ favor.