this is somewhat enjoyable...
Sub-prime loans take toll on Kruse Way
Suburban offices see vacancy rates climb in ’08, industry experts say
Daily Journal of Commerce
POSTED: 06:00 AM PST Tuesday, February 26, 2008
BY TYLER GRAF
Portland’s office market is at a conflicting confluence: On the one hand, the downtown market is booming and is set to perform even better in the coming years. On the other hand, the suburban market has hit a slump, with vacancy rates rising along traditionally strong Kruse Way.
Once considered a major player in the office-market game, suburban offices are seeing increases to their vacancy rates in 2008, according to real estate professionals working along the corridor.
The reasons for the precipitous shift are debatable, but industry professionals point to the sub-prime meltdown as the primary culprit. It’s forced many mortgage companies – a big presence on Kruse Way – to move away.
It’s a sign that the corridor was relying too heavily on one industry, whose practices were economically unsustainable, said Steve Reaume, a 13-year real estate professional currently with Pacific Real Estate Partners.
“Kruse Way is still golden, but it got too top heavy with these mortgage companies,” Reaume said, adding that the market started getting glutted by mortgage companies three years ago, when Kruse Way was viewed as an atypically strong market. “And everyone in the business knew it was getting too top heavy.”
Mark McFarland, also of Pacific Real Estate, agrees with Reaume’s assessment but says that within eight to nine months the market should correct itself, as investors become less cautious about where the market is headed.
Rents along the corridor have also increased, despite the mortgage-company exodus, due to offices being bought and flipped by investment firms.
Early last year, private equity firm the Blackstone Group purchased 1.6 million square feet of office space from Equity Office Properties Trust in the hopes of making superficial improvements to the properties over a short period of time, then selling at a higher value – the common act of “flipping.”
In a two-month time period, the Blackstone Group resized the properties, increasing lobby space and widening hallways. This effectively forced some tenants out of their space and drove up rental rates.
The situation in the Kruse Way area runs counter to what’s happening downtown, where the lack of vacant space – currently hovering around 5 percent – has caught the attention of some real estate professionals. As a result of near-capacity Class A office buildings, less desirable Class B offices within the city are starting to demand higher rates as well, Greg LeBlanc, a real estate analyst at Portland State University, writes in his department’s quarterly report. In the fourth quarter of 2007, rents for Class B offices jumped 9 percent, to $21.16.
“It’s still sort of a soft market – a landlord market,” Pacific’s McFarland said. “But we’re still signing leases (along Kruse Way) with some of the highest rents available.”
For Kruse Way, however, Reaume sees it more as office-market triage: Space sits dead for a while, in part due to the sub-prime fallout, but this gives other companies an opportunity to move there. By the end of the year, he expects the market to have corrected itself.
“These companies have left,” Reaume said, “but other companies will take up the space in the future.”
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