Changing development schemes
By: Chuck Slothower
Wade Lange is a vice president and regional manager with American Assets Trust, which is considering changing one of the four buildings at its planned Oregon Square development from multifamily to office. (Sam Tenney/DJC)
The developer of Oregon Square, the four-block mixed-use development in the Lloyd District, is weighing a major change that illustrates how developers consider the best use for their properties.
American Assets Trust last month quietly proposed changing schemes in Oregon Square’s second phase in a design advice request submitted to the city of Portland. Block 103 would become a speculative office building, instead of one with apartments.
Wade Lange, vice president and regional manager at AAT, said office use is just one option the developer is considering.
“We have no direction yet,” he said. “We’re just looking at options.”
The project description submitted to the Bureau of Development Services isn’t binding. It is meant to give the developer and city staff a framework to discuss an upcoming project.
Yet the indication that AAT is considering a change to offices just months after the Design Commission issued approval bolsters an evident trend among developers toward offices and away from multifamily.
It’s not uncommon for developers to change schemes during the development process, but doing so can be costly.
“It’s a big lift,” said Chris Nelson, co-founder of Portland-based developer Capstone Partners. “To make that change, it’s a pretty big change. You’re going to completely rethink how that property is going to be used and utilized.”
Changing the proposed use of a building in development can easily set a project back a year for redesign and a return to the Design Commission for re-approval, Nelson said. Project teams that change schemes also must go back for different financing because the cost and revenue structures change.
Oregon Square was approved by the Design Commission on Oct. 6, 2016. It was the second trip through design review for Oregon Square, this time with a phased approach and more apartments. The development was first approved by the Design Commission in November 2015.
As approved last year, the building on Block 103 was to be a 30-floor mixed-use building with 347 apartments over ground-floor retail space.
The new proposal would do away with the apartments, replacing them with office space, and adding below-grade parking for prospective office tenants.
Lange met with architects from GBD Architects on Monday to discuss the options for Oregon Square’s second phase. Lange said no decisions have been made, and AAT will take a long view toward the likely market dynamics.
“We’re really looking down the road because we’re quite a ways from putting a shovel in the dirt,” he said. “We just want to examine all the different options and arrive at the highest and best use from an investment standpoint.”
The San Diego-based company acquired more than 16 acres in the Lloyd District in 2011. The four-block development is seen as a keystone property for the district.
AAT was earning an average $24.95 per leased square foot on its Lloyd District office properties, according to an April securities filing. The 581,670 square feet was 75.8 percent leased as of March 31.
Lange said the possible switch to office space is not driven by softening in the luxury apartment market.
“No, it really is just kind of keeping all of our options open as we start working through the details,” he said.
AAT’s Lloyd District apartments were performing well as of March 31, when the company most recently reported public investor data. Hassalo on Eighth’s apartments have largely filled up after opening for leasing last year. The Velomor building’s 177 units were 92.7 percent leased at average monthly base rents of $1,638. The Aster Tower’s 337 units were 91.4 percent leased at $1,626 average rents. And the Elwood building’s 143 units were 94.4 percent leased at $1,497 average rents.
There was no change in scheme for Hassalo on Eighth, which was AAT’s first development in Portland and was completed in 2015.
“It was always going to be residential,” Lange said. “It was what the market needed; it was what Lloyd needed.”
Nelson said it makes sense for AAT to explore office uses for future phases, particularly in the Lloyd District, where an office submarket is already established.
“To switch some portion of the business plan to office seems like the natural thing to do,” he said. “It’s an established area for office and if you see the supply-demand fundamentals changing, it makes sense to make a shift depending on the property and the market.”
The pace of submissions for new multifamily proposals has slowed dramatically since the city of Portland adopted an inclusionary zoning program that went into effect Feb. 1. Oregon Square is not subject to those regulations because it went through the entitlement process before then.
Making multifamily projects profitable has become challenging, Nelson said.
“The economics of ground-up multifamily right now are really difficult,” he said. “They were before the inclusionary zoning regulations, and they were before the relatively new construction excise tax. The economics are really challenging.
“It’s not a rent-growth market anymore – there’s more choice,” he added.
Developers constantly attempt to forecast the likely market for when they develop a given product. In both the office and multifamily sectors, significant new inventory is expected to come to market this year and in 2018.
Office developments by their nature depend on fewer tenants than multifamily ones, making it imperative to score tenants who will take significant space.
“The speculative nature of office has a higher risk,” Nelson said.
Developers in general are trending away from designs that are tied to specific uses. That’s part of the reason for the renewed popularity of historic warehouse structures, which can be used for residential, office, retail or even hospitality purposes, said Noel Johnson, principal at Portland developer Cairn Pacific.
“A good building’s a good building,” he said.
Johnson said Portland’s design review process should be agnostic to how a building is used. More employers are offering the “comforts of home” at work, blurring the tidy definitions of residential and office. Additional trips through the design review process because of a change in use add costs with little benefit, Johnson said.
“It’s an interesting illustration of how our land use and development codes are broken,” he said. “Why is design review concerned with use?”
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